Howard Marks, a respected value investor, is raising concerns about potential signs of a bubble in the stock market. In his latest memo to clients, Marks highlighted five cautionary signs he sees following the S&P 500’s best two-year run since 1998. Marks pointed out that the S&P 500’s current price-to-earnings ratio stands at 22.
Using data from JPMorgan Asset Management, he explained that higher P/E ratios have historically led to lower returns in the long run. Today’s multiple of 22 is near the top of the range, and this level could translate into 10-year returns between plus 2% and minus 2%, the data indicated. Marks warned that rather than poor performance stretching over the long term, a correction in the multiple might be compressed into a short period.
This could result in sharp, sudden sell-offs similar to the burst of the internet bubble in the early 2000s. Apart from valuation, Marks specifically pointed out the “enthusiasm that is being applied to the new thing of AI.” Artificial intelligence has emerged as the biggest investing theme over the past two years, significantly boosting key beneficiaries like Nvidia to jaw-dropping prices.
Bubble concerns persist in stock market
This AI enthusiasm might also extend to other high-tech areas, Marks added. Additionally, the “implicit presumption” that the largest companies are too big to fail also concerned him. The so-called Magnificent Seven stocks — including high fliers such as Nvidia, Microsoft, Apple, and Meta Platforms — were responsible for more than half of the S&P 500’s 2024 gain, according to Bespoke Investment Group.
Many on Wall Street see more gains ahead for these juggernauts. Marks, whose firm managed $205 billion in assets as of September, also raised the question of whether some of the S&P 500’s advance came from automated buying by passive investors, who don’t take value factors into consideration. The 78-year-old investor started writing investment memos in 1990, and they have become required reading on Wall Street.
Even Warren Buffett has said he reads them regularly and always learns something from them. Marks said he has been reflecting on a quote often attributed to Buffett: “When investors forget that corporate profits grow about 7% per year, they tend to get into trouble.” However, Marks revealed that when asked, Buffett said he never said that. “But I think it’s great, so I keep using it,” wrote Marks.
