Legendary investor Jeremy Grantham who has accurately predicted past financial crises and market tops said the U.S. stock market is now in “super bubble” territory.
“I’ve always looked at it from the point of view that the longer and the bigger and the higher it goes, the more exciting and dangerous it will be, and this has moved up the rank of super bubbles,” Grantham, who co-founded investment management firm GMO, said on a Bloomberg podcast interview that published Friday.
That said, the current bubble building on Wall Street is nowhere near Japan’s 1989 “mother and father of all super bubbles” or that country’s real estate bubble of the same era, he added.
His dim view of U.S. stocks isn’t new. In early 2024, he warned investors to avoid them — the year ended with a 23% gain for the S&P 500 SPX+1.59%. He forecast a potential 50% drop for stocks in 2023 when the index finished up 24%. But the investor is also widely followed thanks to his correct calls on the housing market crash and dot-com bust.
His latest warning comes as U.S. stocks have struggled for gains amid worries about President Donald Trump’s tariffs with major technology stocks like Tesla
TSLA+3.91% and Nvidia NVDA+3.97% also stumbling. Grantham notes that “every measure of traditional value,” for stocks, including the cyclically adjusted price-to-earnings ratio, is at record levels.
One of the market’s main drivers, AI, like “every really important new technology,” is also surrounded by a bubble, he said.
“It will, of course, change our world. It is, of course, impossible to know in what ways, and whether it will be entirely beneficial or not,” he said. “If the government does not smooth out the benefits of AI, you will have either starvation or revolution.”
As for where Grantham would invest his money now, he favors those aimed at “greening the economy,” without identifying particular assets.
As of Jan. 31, top stocks in GMO’s Climate Change Strategy were biofuels group Darling Ingredients DAR-2.12%, Korean battery and storage company LG Chem 051910-6.57%, solar group Sunrun RUN-8.34%, biofuels company Ameresco AMRC-35.62% and Canadian copper producer Ivanhoe Mines IVN-1.44%
He believes that will be a “long and bumpy” road, but a much needed massive undertaking requiring plenty of investment and workers to get done. It’s also a beaten-down area of the market, he noted.
“Unlike most things in the stock market, I would say that is an area that we’ll have sooner or later, a massive regrouping and a huge outperformance of the rest of the market,” said Grantham.
He also sees a system that faces lots more big shocks, and “in that environment you do not want to be caught with a lot of leverage,” which he said will just crush businesses. “You have to be able to withstand shocks unexpectedly arriving, and to do that, you need little or no debt,” plus decent profit margins for a cushion, he said.
“The [1930s] were a pretty good ultimate reminder. That things are cheap, usually for a pretty good reason, so you have to tread carefully,” he said. “If you’re going to play the cheap game, you’ve got to make sure, it is armor-plated with as much quality as you can get into it.”
Turning to non-U.S. markets that have been getting more investor love, such as China and European stocks, Grantham said he said they are “much less dangerous to own and will very likely over five or 10 years crush the U.S. market as has happened several times.” He said U.S. and foreign markets often take turns having “great” decades.
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