"The Stock Market Has Risen Too Much"... A Grim Warning from the 'Legend of Wall Street'

'Legend of Wall Street' Howard Marks

"US Stock Market Has Risen Too Much... Could Plummet in the Short Term"

Concerns Over S&P500 Overvaluation and AI Craze

Higher Concentration of Few Companies Than During the Dot-com Bubble

Legendary Wall Street investor Howard Marks, chairman of Oaktree Capital, expressed concerns over excessive optimism in the US stock market, warning of a significant short-term decline.

According to US economic media CNBC on the 7th (local time), Marks emphasized in a memo sent to clients on the 2nd that investors should be wary of excessive optimism about the US stock market. He stated, "I am not declaring the current stock market a bubble, but several warning signals are being detected," and pointed out, "There is a possibility of a substantial decline in the short term." He also added, "In the long term, there is a high possibility of recording low returns."

Marks explained that the price-to-earnings ratio (PER) of the S&P500 index is about 22 times, which is significantly above the historical average. He analyzed, "A high PER has historically led to low long-term returns," and "At the current level, the S&P500 is likely to remain between an annual average return of 2% and -2% over the next decade."

He also warned that if high valuations (price levels relative to earnings) are adjusted in the short term, a sharp sell-off similar to the dot-com bubble collapse in the early 2000s could occur. Marks is well-known for accurately predicting the dot-com bubble. He said, "Most of the companies whose stock prices soared in the past disappeared after the dot-com bubble," and "Excessive optimism about new things has always led to pricing errors."

He also expressed concerns about the recent artificial intelligence (AI) craze. He pointed out, "There is an implicit assumption in the market that the giant tech companies, known as the 'Magnificent 7 (M7),' are 'too big to fail,'" and "This dangerous belief could lead to significant losses." The M7, composed of companies like NVIDIA, Microsoft, Apple, and Meta, whose stock prices are soaring, accounted for 33% of the S&P500's market capitalization at the end of last year. This is double the share from five years ago. Marks reported that when the dot-com bubble peaked in the 2000s, the top 7 stocks accounted for 22%. He questioned whether the rise of the S&P500 was due to automatic buying by passive investors who do not consider value factors.

Meanwhile, Marks' investment memos, written since the 1990s, are considered must-read materials on Wall Street. Warren Buffett, chairman of Berkshire Hathaway, also stated that he regularly reads his memos. Oaktree Capital managed $205 billion in assets as of September last year.

Reporter Da-yeon Lim allopen@hankyung.com