• The S&P 500 has returned 26% so far this year.
• But with expectations soaring, how long can the rally last?
• Some Wall Street experts warn of subdued forward returns and draw comparisons to the dot-com bubble.

It’s been another breakout year for the S&P 500 as impressive results and improving expectations have propelled the benchmark to a 26% return since January.

But those increasingly rosy expectations are raising concerns among some of Wall Street’s top investors and strategists about how sustainable the rally is and how historically high valuations could affect future returns.

A couple of widely followed valuation metrics reflect this very bullish outlook. There is the so-called “Warren Buffett indicator”, or the ratio of total market capitalization to GDP.

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And then Shiller’s cyclically adjusted price/earnings ratio for the S&P 500, which is a 10-year rolling average of the index’s trailing 12-month PE ratio.

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Because high valuations are an indication of high future expectations, they have historically meant subdued long-term returns. Expectations are either never met, or even if they are, the good performance is already priced in. Research from Bank of America shows that initial valuations explain 83% of the S&P 500’s returns over the following decade.

Bank of America

With current valuations sitting at extreme levels, many market experts have pointed out that returns may be relatively poor going forward. Below are comments some of the biggest voices in the market have made in recent weeks on the matter.

David Kostin, Chief US Equity Strategist at Goldman Sachs

Kostin said in October that current Shiller CAPE ratio levels for the S&P 500 mean the index is likely to return 3% on average over the next decade. For context, that’s lower than the risk-free yield on 10-year government bonds.

Here is that view shown in diagram form. It well illustrates the close connection between values ​​and future market development that Bank of America mentions.

Goldman Sachs

In an interview with Business Insider later in October, Kostin made a couple of comparisons with the dot-com bubblewhich peaked in 2000. One is that the valuations of the largest stocks in the market are significantly higher than the rest of the S&P 500.

Goldman Sachs

Another is that the market capitalization of the top stock in the index is hundreds of times greater than that of the 75th percentile.

Goldman Sachs

“We’re at a level of concentration in the US market today that we haven’t really seen since the tech bubble,” Kostin told BI. “It’s even more concentrated than it was 20 years ago.”

Rob Arnott, founder of Research Affiliates

Arnott, whose clients include some of the biggest institutions on Wall Street, also drew dot-com bubble comparisons. While he also sees poor long-term returns ahead of the S&P 500, he said large-cap growth stocks — which make up much of the index — could suffer a short-term pullback.

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“This looks and feels like the year 2000 to me,” Arnott told BI earlier this month. “Are we likely to see a bear market in the next two years for large-cap growth? Yes.”

He said profit growth is unlikely to live up to expectations, and disruptors in AI will take market share from current top companies.

Nelson Peltz, co-founder of Trian Partners

Peltz said at CNBC’s Delivering Alpha conference earlier in November that valuations have gotten too high, and something will come to knock them down.

“Trees don’t grow to the sky, certainly not continuously,” Peltz said, using an expression that refers to values ​​becoming disconnected from reality. “There’s going to be something to disrupt that. I think you’ve got the euphoria of the election.”

Dave Sekera, US market strategist at Morningstar

Sekera also said the day after the election that enthusiasm over Trump’s win and the prospect of higher growth made the market overvalued.

“When I look at the market today, with today’s bump, it’s probably trading at a 3% to 4% premium over fair value,” he said. “Now, a lot of investors might say, ‘Eh, 3% to 4% doesn’t sound like much from a market perspective,’ but when I look at our valuations going back to 2010, less than 20% of that time we’ve seen the market trade with as much of a premium or more.”

He urged investors not to get caught up in the hype.

“Based on your risk tolerance, I probably wouldn’t make any changes here today,” Sekera said. “And when you do make changes, make sure you only make changes when there really is a change in your underlying fundamentals and only make changes to your portfolio based on sound analysis.”

Bill Smead, founder of Smead Capital Management

Smead, whose value fund has beaten 97% of similar funds over the past 15 years, according to Morningstar data, also said post-election trading exacerbated a already overvalued market.

“It’s a disaster waiting to happen,” he told BI. “We have put the icing on the economic euphoria cake and lit the candle on top.”

One piece of evidence showing euphoria is the level of household equity, Smead said. Right now, around 42% of household assets are in stocks, the highest level in history.

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Jeremy Grantham, co-founder of GMO

Grantham has been warning of a “superbubble” in stocks for a few years now, and recently reiterated his dire outlook for the market.

“Really good things happen in the Internet phase, ’98-’99. But they exaggerate it,” Grantham said in an interview with Morningstar published October 30.”When you have these amazing developments, they overdo themselves in the short term, they crash in the medium term, and then they come out of the wreckage and change the world in the long term. And that’s what I expect will happen this time.”

Grantham called the 2000 and 2008 market crashes.

David Einhorn, founder of the hedge fund Greenlight Capital

Einhorn said at CNBC’s Delivering Alpha conference that he sees the market doing well in the short term. But he said there’s no denying how high valuations are, calling today’s environment the “most expensive market ever, as far as I can see, at least since I’ve been in charge.”

That means it’s probably not the best time to buy in, he said.

“This is a really, really, really expensive environment, but that doesn’t necessarily make me bearish. Asset prices can trade at the wrong price, and they can trade at the wrong price for a long period of time,” Einhorn said.

He added: “I just observe that it’s a really expensive market that if you buy and hold for a very long period, I doubt this is a good – you’ll look back and say this was a good starting point for all. of the entry points that you may have.”

Albert Edwards, chief strategist at Societe Generale

Edwards, who is known for his regularly bearish outlook and calls out the dot-com bubble, hasn’t changed his tune. On Thursday, he wrote in a client note that the U.S. stock market relative to other developed markets has grown to levels seen in previous U.S. market bubbles.

Societe Generale

“The dominance of US stocks in the global indices (MSCI) has now surpassed the extreme of the early 1970s,” Edwards said. “And the valuation gap between the US and Europe has never been this wide. High valuations and EPS optimism make the US stock market vulnerable to ‘bad’ news.”

US stocks’ rising PE ratios are also at odds with rising 10-year Treasury yields, he said.

Societe Generale

“Just look at the stock euphoria of 2018, which initially bucked rising bond yields — until they didn’t. The same thing happened in 2022,” he said. “At some point, rising bond yields will just as surely start hurting stocks.”