26 July 2023
John Hussman, a notable expert on asset bubbles and successful predictor of the stock market crashes in 2000 and 2008, has issued a bleak warning about the future of the S&P 500. In his view, the index could plummet by 64% from its current level. This drastic crash would be precipitated by extreme equity valuations and “unfavourable market internals” which, according to him, would result in the collapse of what he refers to as “the most extreme yield-seeking speculative bubble in U.S. history.”
Hussman is not dissuaded by the recent positive performance of the US stock market, which has seen the S&P 500 rallying almost 19% this year. He contends that the market’s stretched equity valuations suggest that such a sharp plunge is necessary to return the market to more balanced conditions.
He further adds, “At present, the valuation extremes we observe imply that a -64% loss in the S&P 500 would be required to restore run-of-the-mill long term prospective returns.” High valuations can imply that stocks are expensive in relation to several key metrics such as company earnings or sales, suggesting limited room for stock price increases and potentially low returns.
This outlook persists despite an impressive rally in tech stocks such as Nvidia, Apple, and Tesla, driven by heightened investor interest in artificial intelligence. According to Hussman, both stock market price action and broader market sentiment, both currently unfavourable, drive the health of the stock market.
Even amidst the market’s rebound since October, Hussman remains convinced that this initial loss will only be a precursor to a major collapse of the speculative bubble, creating a potentially dark future for the US stock market.