- Stock prices are soaring, but some bears are still sounding the alarm that the bubble is about to burst.
- Bearish forecasters are predicting a crash as inflated stock valuations return to reality.
- Some prominent investors say stocks have been giving multiple warnings that a sharp drop is on the way.
Stocks are set to continue rising into 2024, but the bears aren’t quieting down, with some warning the market is in a bubble that’s about to burst.
Painful selling pressures have been building in recent weeks as stocks have continued to hit new record highs: The S&P 500 and Nasdaq closed at all-time highs for the fourth straight week this week, and tech giants such as Apple and Nvidia continue to surpass $3 trillion in market capitalization.
But Wall Street bears warn that the craze for artificial intelligence mirrors the internet bubble of the late ’90s, and that the recent surge in stock prices bodes ill for investors.
Here’s what five forecasters have to say about the recent stock market rally and why they think the stock market is headed for a decline.
Harry Dent
Economist Harry Dent says the stock market is in the midst of a “bubble within a bubble” and that soaring asset prices could eventually crash, with stocks losing more than half their value.
In a recent interview with Fox Business Network, Dent predicted that when the bubble finally bursts, the S&P 500 could fall as much as 86% and the Nasdaq Composite Index could fall about 92%.
Dent added that the bubble, built by years of easy monetary and fiscal policy, is already showing signs of “topping out. ” Stock prices are “barely” hitting new highs, and he estimates that stocks have been high for the past 14 years — much longer than most historical bubbles, which typically last five to six years.
“Stock prices have been high for a longer period of time so we should be prepared for a bigger crash than we saw in 2008 and 2009,” he warned.
Dent has long been a vocal advocate of a major market crash, writing a book in 2009 that predicted a stock market crash and subsequent economic recession that he said could last for more than a decade.
Capital Economics
According to Capital Economics, stocks could rise another 20% before the bubble bursts.
The research firm predicts that the S&P 500 could experience a sharp correction after rising to 6,500. That’s because there is limited room for the market to rise before prices start to fall, according to John Higgins, the firm’s chief market economist.
Higgins pointed to the excessive hype around artificial intelligence on Wall Street and said stock prices appear to already be in the late stages of a bubble.
“Bubbles tend to be most inflated at the end when excitement is at its peak,” Higgins warned.
John Hussman
Elite investor John Hussman believes stock prices could fall by as much as 70% if the bubble bursts.
Hussman has been warning of a sharp correction in stock prices this year, and in a recent client note said several warning signs point to pain ahead.
According to his firm’s most reliable valuation metric, the S&P 500 appears to be the most overvalued since 1929, just before the stock market crashed and the U.S. economy fell into recession.
“I continue to view the market rally of recent months as an attempt to ‘catch the froth on yesterday’s bubble’ rather than a new, sustained bull market rally,” Hussman said in a recent note. “I also believe the S&P 500 could fall around 50-70% by the time this cycle is complete, simply as long-term expected returns return to the mundane metrics investors associate with stocks.”
“Simply put, my impression is that the period since early 2022 constitutes a prolonged peak of one of the three major speculative bubbles in U.S. history,” he later added.
Richard Bernstein Advisors
According to the RBA’s chief investment officer, Richard Bernstein, large caps are significantly overvalued and appear to be on the brink of a major crash.
Bernstein wrote in a recent note that only a handful of stocks are propping up the market, and that the current mega-cap leaders have lost much of their gains and are set to post dismal returns going forward.
In the worst case scenario, the most highly valued stocks could fall by 50%, causing losses comparable to the collapse of the dot-com bubble, he predicted.
“That’s exactly what we’re seeing,” Bernstein warned. “Multi-year periods of significant underperformance.”
But for investors who are diversifying into other parts of the market, this could be a great opportunity, said Bernstein, who noted that his firm is bullish on nearly every sector of the market except for the top seven large-cap stocks.
U.S.
According to UBS, the stock market is already showing signs of a bubble.
The bank said there are typically eight signs of a market bubble forming, six of which have already appeared. Strategists pointed to signs such as increasing pressure on corporate profits, narrowing market breadth and aggressive stock purchases by individual investors.
The good news is that the bubble may not burst anytime soon: Analysts say stocks are most similar to the bubble that occurred in 1997, not 1999.
“We would only invest based on the bubble theory if it were 1997 and not 1999 (as we think it is),” the strategists said in a recent note.
