US Stock Market Turns Pessimistic Again... GMO Founder Says "Superbubble Has Not Burst Yet"

Second Half Decline Driven by Corporate Earnings... Morgan Stanley "If Recession Becomes Clear, S&P 500 Index Could Fall to 3000"

[Asia Economy Reporter Park Byung-hee] As the New York stock market, which had rebounded for two months in the second half of the year, recently turned downward, pessimism is pouring in again. It is said that the long-term downtrend (a brief rebound within a bear market) of the New York stock market has ended, and we must prepare for a sharp decline again.

According to Bloomberg on the 31st of last month (local time), Jeremy Grantham, co-founder of the major U.S. asset management firm GMO, warned in a report released that day that the New York stock market super bubble has not yet burst. Grantham had warned earlier this year that the New York stock market would plunge by 50%. Although the S&P 500 index recorded the largest decline since 1970 in the first half of this year, the drop from the previous peak was only 25%. Moreover, it reduced the decline by rebounding for two months in the second half of the year.

Grantham pointed out that the rise in the New York stock market from mid-June to mid-August, lasting two months, was a typical bear market rally. According to Grantham, a super bubble collapses through several stages. After a stock price decline like in the first half of this year, a slight rebound follows, and then as economic fundamentals collapse, the stock market heads toward a bottom.

Grantham predicted a stock price decline, saying that stock, bond, and housing prices are excessively high, and that commodity prices and the hawkish stance of the Federal Reserve (Fed), the central bank, will act as negative factors. He also analyzed that while inflation was the cause of stock price declines in the first half, corporate profit margin slowdown will be the cause in the second half.

Grantham said, "It is certain that we will go through a very difficult economic and fiscal period," adding, "However, I am not sure whether the market will become uncontrollable like during the Great Depression in the 1930s, be well controlled like in the 2000s, or fall somewhere in between."

Jeremy Gransum, Co-founder of GMO
Photo by AP Yonhap News

Mike Wilson, chief investment strategist at Morgan Stanley, also pointed out in an interview with Bloomberg that the low point of the New York stock market this year has not yet been confirmed. Wilson also said that investors are overly optimistic about corporate profits and that corporate profits will be a negative factor for the New York stock market.

He pointed out that the price-to-earnings ratio (PER) of the S&P 500 index is excessively high. Since the 1950s, the average PER of the S&P 500 index during 11 bear markets was 11 times, but even at the low point in early June this year, the PER was 18 times. The current PER exceeds 19 times.

Wilson said that the expected corporate operating profit margin is deteriorating faster than expected, and as corporate profits are revised downward, the PER will fall and the S&P 500 index is expected to confirm its low point between September and December. He pointed out, "The reason the PER is high is not because of the Fed's tightening, but because stock investors are overly optimistic about profit forecasts."

Wilson said that the index tends to fall later than individual stock prices, and while typical developed market stocks may have confirmed their low points in June, the index could fall further than the June low. The S&P 500 index fell to 3666.77 in early June and then rebounded for two months. During the two-month rebound, it rose up to 17% above the early June low. Last month, it turned bearish again, falling 4.2%, and closed at 3955.00.

Wilson predicted that if the U.S. economy experiences a mild recession or a soft landing, the S&P 500 index could fall to 3400. He also warned that if the recession becomes more pronounced, the S&P 500 index could fall close to 3000. He said it is difficult to predict the bottom of the S&P 500 index and expects the decline to continue for at least one to two quarters.

Wilson also pointed out that the Fed is structurally always late in responding because the employment and inflation indicators, which the Fed uses as standards for monetary policy operation, are lagging indicators. He said that once the labor market starts to collapse, it is too late, and by then, evidence that the U.S. economy has fallen into a recession will already be confirmed.

This content was produced with the assistance of AI translation services.