Veteran Fund Manager Issues Blunt Warning on Stock Markets

Over the past 12 months, the stock market has been on a tear, with the S&P 500 climbing 24%, well above the average annualized return of 10% over the past 40 years.

Since last year, the Fed will cut interest rates several times this year is expected to bring a strong impetus for the stock market.

With the economy growing at an annualized rate of 3.4% in the fourth quarter and inflation holding at an annualized rate of 3.5% in March, the enthusiasm for rate cuts has subsided.

According to the CME's FedWatch Tool, interest rate futures positions show a probability of two or fewer rate cuts of 71%.

Some leading experts, such as Apollo Global Management economist Torsten Slok, expect the Fed to take no action this year.

Harvard University economist Larry Summers (Larry Summers) said the Fed may raise interest rates next.

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Summers Sees Possible Rate Hike

Harvard University economist, former Treasury Secretary Larry Summers (Larry Summers) that the Fed this year, the possibility of raising interest rates for 15% to 25%.

A strong economy is fueling the stock market rally as interest rate forecasts shift. The Atlanta Fed's GDPNow forecast tool suggests that the first quarter growth rate will slow to 2.4%, but that's still a strong number.

Investors expect economic strength to boost earnings. According to FactSet, analysts expect the S&P 500 to post a 3.2% increase in first-quarter earnings from a year ago, marking the third consecutive quarter of growth.

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Earnings season kicked off on April 12, and major banks released mixed results.

Another factor that drove the stock market higher last year, of course, was investors' fervor for artificial intelligence. This boosted tech stocks in particular. The tech-heavy NASDAQ Resonance Carbide Index hit an all-time high on April 11th. Artificial intelligence giant Nvidia has risen about 1,25% from its low in October last year.

S&P 500 Valuation Stretched to the Limits

The market rebound has pushed stock valuations above historical norms. The forward price-to-earnings ratio for the S&P 500 was 20.5 on April 5, above the five-year average of 19.1 and the 10-year average of 17.7, according to FactSet.

To some experts, this suggests that the stock market is overvalued. Vincent Mortier, chief investment officer at Amundi, Europe's largest money fund manager, is one of those "bearish" people." I have a feeling we are in the early 2000s, when tech stocks crashed," he told Bloomberg.

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Problems in the commercial real estate market, he said, meant there was "a little bit of 2007" where the financial system began to wobble.

Fund Manager Doug Kass' Strong Opinion on Stocks

TheStreet Pro's Doug Kass is another famous "puttist," a hedge fund manager with a career spanning the 1970s of the 20th century who worked for Leon Cooperman's Omega He is a hedge fund manager with a career spanning the 1970s and was Director of Research and Massachusetts at Omega Advisors, where Leon Cooperman worked.

Like Summers, he thinks inflation won't go away easily." Kass wrote on April 11: "The Fed's 2024 statement that inflation will soon be under control is as silly and wrong as its 2021 statement that inflation will be temporary.

On April 6, he cited a list of factors that would weigh on the stock market in the future:

• Geopolitical tensions in the Middle East. Escalating tensions between Iran and Israel are driving up oil prices, which will lead to more inflationary concerns.

• The Fed is likely to keep interest rates higher for a longer period of time and the intensity of easing will be less than consensus expectations.

• Interest rates have been rising in recent months. The equity risk premium is at its lowest in 16 years. The equity risk premium is the excess return of equities over safe bonds.

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• "Signs of 'deflation' (stagnant inflation, slowing economic growth and corporate profits) continue to accumulate".

• Commodity prices rose, with gold and silver hitting new highs.

• Market breadth has been deteriorating, which means that stock market gains are not common among companies.

• When energy becomes a market leader, as it is now, it's usually a sign that the bull market is maturing.

• There is little room for error in valuation.

• Investor sentiment has gone up to the extreme 耑 of bullishness.

Cass lists a long list of bearish downsides, which suggests that there's a lot that has to go right for the stock market to keep going higher, but not much that can go wrong for it to go lower.

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