Investors cheering the rally in stocks this year should be prepared for the good times to end, and the S&P 500 risks seeing dismal returns for the next 10-15 years.
That's according to Bill Smead, a top 2% fund manager who remains one of Wall Street's biggest bears, even in the face of the market's 8% rally in 2024. That's because stocks look to be in the midst of a speculative bubble, he's warned previously, and it could set investors up for a "dead ball" era of performance, the Smead Capital Management founder said in a recent note to clients.
That "dead ball" period will last for at least the next decade, Smead said, and it will only end once all the enthusiasm for the market's most expensive stocks has bled out. The process could lead to losses on par with the dot-com bubble and the Great Financial Crisis, he said, when stocks suffered double-digit drops.
"It will be more like the '00-'03 bear market, or more like '07-'09," Smead said in an interview with Business Insider. "We'll probably get two full-blown bear markets in a 10-year time period that will basically negate making any money in the S&P 500 index. You won't want to buy the S&P 500 index until it becomes kind of a swear word."
Smead thinks the losses could be fueled by stubbornly high inflation. The consumer price index has come in hotter-than-expected for the last three months, with prices accelerating 3.8% year-over-year in March, according to the Bureau of Labor Statistics' latest CPI report on Wednesday.
That's making the economic landscape look precariously similar to the 1970s, Smead said, right before inflation spiraled out of control and led stocks to struggle.
Stubborn inflation raises the risk the Fed will keep interest rates higher for longer, and some experts, like JPMorgan boss Jamie Dimon, have warned interest rates could end up rising as high as 8%.
"It just reeks of inflation," Smead said of the economy. "We are entering an inflationary era, and that's going to cause a complete shift in what we like to call the investment zeitgeist … the stock market itself cannot do well when that zeitgeist is changing, because all the money is in [there]."
Investors have been eager to put their cash in AI stocks and mega-cap leaders like those in the Magnificent Seven, but Smead has repeatedly warned to stay away from overvalued areas of the market. He previously predicting that the most expensive stocks could plunge as much as 70% in value.
"Nobody ever talks about the massive percentage of growth stocks that carried euphoric prices, do poorly and get slaughtered," he said in a note last week.
That doesn't mean there won't be an opportunity to make money, even during a dead ball period for the market. Smead's firm remains bullish on "out of favor" investments that typically benefit from inflation, such as oil and gas, real estate, and gold.
"In the dead ball era, we really found places to get hits and score runs," he said, pointing to the outperformance of those sectors during the 70s. "We're in that same situation."
Other bearish forecasters on Wall Street have also warned of a correction looming for stocks, given that valuations are at dizzying heights. Still, the consensus view on Wall Street is fairly optimistic, and nearly half of investors say they're bullish on stocks over the next six months, according to the AAII's latest Investor Sentiment Survey.
