US stocks may be on the brink of a significant crash, according to investor Michael Burry, known for accurately predicting the collapse of the mid-2000s housing bubble, as detailed in a recent Substack post. Burry highlighted the precarious state of the market, emphasizing that it is currently marked by historically high valuation multiples, which have not reverted to historical averages for an unprecedented 34 years.
Burry’s analysis focused on the S&P 500, noting that for the Shiller cyclically adjusted price-to-earnings (CAPE) ratio to decline from its current level of 40 to the average of 27 since 1990, the index would have to plummet by around 32% from its early-year level to approximately 4,700 points. Furthermore, he indicated that a more drastic decline of 52%, bringing the index down to about 3,300 points, would be necessary to align with the long-term average CAPE of 19.
The investor attributed this ongoing resistance to a return to mean valuations to several factors, including the surging popularity of passive investing through index funds and a significant shift in investment from bonds to stocks among baby boomers. He explained that market-cap-weighted indexes like the S&P 500 tend to funnel capital into the most valuable companies, exacerbating the issue. Stock buybacks and governmental interventions have also contributed to staving off major sell-offs, but Burry warned that these forces have led to increased market fragility.
Burry expressed concern that the market’s resilience could be threatened as companies, particularly in the technology sector, are increasingly shifting from stock buybacks to borrowing capital for data center expansions to support artificial intelligence initiatives. He also noted the looming prospect of baby boomers liquidating substantial amounts of stock over the coming years due to mandatory minimum distributions from retirement accounts starting at age 73.
Furthermore, he cautioned that the market is becoming more interconnected and vulnerable due to rising geopolitical risks and the changing financial dynamics of major tech firms. Burry speculated that the next market downturn could be triggered by factors such as disillusionment with venture capital-backed startups, a decline in free cash flow for tech giants, or simply the passage of time.
He concluded with a grim forecast, suggesting that the next market crash could be even more severe and enduring than past downturns, leaving investors grappling with a lasting atmosphere of gloom that could hinder a rapid recovery. Burry’s insights serve as a stark warning for those invested in the currently inflated market landscape.
