Howard Marks, one of the most respected value investors best known for foreseeing the dot-com bubble, identified some red flags in the market, such as valuations, that could mean poor long-term returns or a sharp decline in the near term. In his latest memo to clients, the co-founder and co-chairman of Oaktree Capital Management listed five things he’s seeing in the stock market following the S&P 500’s best two-year performance since 1998. Warning. “It should come as no surprise that investment returns are largely determined by the price paid,” Marks wrote. “As such, investors clearly should not be indifferent to today’s market valuations.” Marks’ memo puts the S&P 500’s current price-earnings price at The ratio is set at 22. The data shows that today’s multiple of 22 is near the top of that range, a level that would translate into a 10-year return of between plus 2% and minus 2%. Marks noted that over the long term, price-to-earnings ratio adjustments could also be compressed into a short period of time, leading to a sharp, sudden sell-off, as happened when the dot-com bubble burst in the early 2000s. .SPX 1Y mountain S&P 500 In addition to valuations, Marks also specifically questioned the “enthusiasm for new things in artificial intelligence.” Artificial intelligence has become the biggest investment theme of the past two years, driving major beneficiaries such as Nvidia to eye-popping prices. Marks added that this enthusiasm for artificial intelligence may extend to other high-tech areas as well. At the same time, he said he was also concerned by the “implied presumption” that the seven largest companies would be “too big to fail.” The so-called Magnificent 7 stocks, which include strong performers such as Nvidia, Microsoft, Apple and Meta Platforms, account for more than half of the S&P 500’s 2024 gains, according to data from Bespoke Investment Group. Many still believe these giants will gain more. Marks, whose firm managed $205 billion in assets as of September, also raised the question of whether the S&P 500’s gains come in part from automatic buying by passive investors who don’t factor in value. The 78-year-old investor began writing investment memos in 1990 that have become must-read on Wall Street. Even Warren Buffett says he reads these articles regularly and always learns something from them. Marks said he had been thinking about a Buffett quote recently: “Investors tend to get into trouble when they forget that corporate profits grow about 7% a year.” But Marks said he asked his friend Buffett about this quote, The legendary investor says he never said that. “But I thought it was great, so I kept using it,” Marks wrote.
