AI is overhyped, US markets are grossly overvalued, and a recession is imminent, according to
Jeremy Grantham. Without the AI frenzy, stocks would have fallen another 20% or 30% in 2023,
the investor claimed.
Foreign conflicts, particularly at a time when asset values are at all-time highs, are a concern for
Grantham.
Jeremy Grantham has warned that stocks are ridiculously overpriced and will likely struggle,
artificial intelligence is a bubble that will eventually burst, and the economy will experience a
mild recession or worse.
In a recent interview with ThinkAdvisor, the founding and long-term strategist of fund manager
GMO advised against investing in US stocks. “They’re almost ridiculously higher priced than the
rest of the world,” he stated.
“This year will be difficult for the stock market,” he said. In comparison to overseas competitors,
American companies’ profit margins are at all-time highs, he continued, putting equities in
“double jeopardy” as both earnings and multiples could decline.
Market historian Grantham warned of a multi-asset “superbubble” at the beginning of 2022,
saying it burst that year when the tech-heavy Nasdaq Composite fell 33% and the S&P 500 fell
19%.
He said that the sell-off was “rudely interrupted” by the AI craze in early 2023, which “changed
the flight path of the entire stock market.” Stocks would have fallen another 20% or 30%, he
claimed.
“AI isn’t a hoax, as bitcoin basically is,” the seasoned investor declared, but he also added that
the “incredible euphoria” around it wouldn’t endure. Nevertheless, he predicted that within the
ensuing few decades, it might prove to be just as transformative as the internet.
Despite strong GDP growth of 3.3% in the fourth quarter, low unemployment, annualized
inflation below 4% in December, and the possibility of many rate cuts this year, Grantham also released a dire assessment for the US economy. However, there appears to be problems ahead given the inverted yield curve and the extended drops in key economic indicators.
He predicted that “the economy will get weaker.” “We’ll have, at least, a mild recession.”
Grantham also flagged the threat posed by conflicts in Ukraine and the Middle East, warning that wars can foster a geopolitical backdrop that’s “scary as hell and in which bad things can happen.” The backdrop is especially worrying when assets are at record highs, he added.
“What I specialize in other than bubbles are long-term, underrated negatives,” Grantham said.
“And my God, there’s a rich collection of negatives right now.”
The bubble guru urged investors to be careful, and recommended they seek out undervalued assets in emerging markets like Japan, depressed sectors like natural resources, and growth areas like climate-change solutions.
It is important to note that Grantham’s pessimistic predictions haven’t come true in the last several years. He said in April, for instance, that in the worst-case scenario, the S&P 500 might be sliced in half to about 2,000 points. However, since then, the benchmark stock index has risen to an all-time high of more than 4,900 points.
