Grantham’s US stock market warning is alarmist

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AI bubble a worry but stock valuations not as high as they would appear

GMO founder and long-time bear Jeremy Grantham is sounding the alarm about US valuations in his latest missive.trades on a cyclically-adjusted price-earnings ratio of 34, which is “the top 1 per cent of history”. This, coupled with near-record profit margins, suggests investors are “predicting near perfection”.

Cape ratios were much lower in the distant past but have been rising for decades due to structural market changes. Indeed,’s quarterly Guide to the Markets shows the US Cape ratio has averaged 27.55 over the last 30 years. This suggests today’s valuations are challenging, but not wildly out of whack with recent decades. Indeed, the US Cape ratio was at similar levels in January 2018. Since then, the S&P 500 has almost doubled.

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