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Bubble expert Jeremy Grantham predicts weak earnings will hammer stocks – and warns the S&P 500 could plunge another 25%

Jeremy Grantham.

REUTERS/Nicholas Roberts

  • Jeremy Grantham expects feeble company earnings to worsen the stock-market downturn.
  • The GMO cofounder suggested the S&P 500 could plunge by another 25% before reaching a fair value.
  • Grantham warned the market downturn could last anywhere between six months and three years.

Jeremy Grantham warned a looming slump in corporate profits would send stocks tumbling again, and suggested the S&P 500 could plunge by another 25%, in a recent interview with the Associated Press.

“Of course earnings will now come down,” the veteran investor and market historian said. “The big second shoe falls where earnings decline,” he continued, noting the first shoe was the compression of valuation multiples for stocks.

Grantham estimated the S&P 500’s fair value in a year’s time would be around 3,000, and emphasized it could trade below that level for several months. The benchmark index has already sunk by 18% this year to around 3,940.

GMO’s cofounder and chief strategist suggested that stocks could rebound once investors expect the Federal Reserve to start cutting interest rates. However, he asserted the rallies would probably only last a couple of weeks, as they have in previous bear markets.

Grantham sounded the alarm on a “superbubble” in asset prices earlier this year, and predicted a devastating crash, a near-term recession, and a historic loss of wealth.  Stocks, crypto, and other assets have plummeted in value since then.

“It’s likely that there will be considerably more pain before this is finished,” he told the AP, noting the market downturn could last anywhere between six months and three years. Historically, many people who buy into bubbles don’t make any money for a decade, he added.

The Fed recently started hiking rates to curb raging inflation. Tighter monetary policy and soaring food, fuel, and housing costs threaten to dampen consumer demand, sapping corporate profits and potentially plunging the US economy into recession.

How we got here, and who loses the most

Grantham ranked the pandemic boom in asset prices as “one of the great speculative periods,” fueled by near-zero interest rates, the Fed’s aggressive bond purchases, and fiscal stimulus.

“People were at home, bored out of their minds and getting a check from the government, so why not speculate?” he said, voicing their mindset. However, he cautioned that ostensibly cheap ways of investing, such as zero-commission trading, can wind up being hugely expensive, and money usually flows from amateurs to professionals over time.

The venerable fund manager added that the biggest losers when a bubble pops are those in their mid-40s. Retirees have already pocketed a lifetime of returns, while young people have the chance to invest cheaply and compound their wealth over several decades.

Read more: BlackRock equities chief investment officer says now’s the time to shift money from US stocks and cash into beaten-down European companies. He lays out the 3 key reasons why and reveals what investors should buy.

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