Jeremy Grantham Warns of Looming "Super Bubble" in U.S. Stocks Predicts 50% Correction

Word on the StreetSunday, Mar 2, 2025 8:01 am ET
1min read

On February 28, renowned value investor and co-founder of GMO, Jeremy Grantham, issued a stern warning that the U.S. stock market is currently in a "super bubble." Grantham, known for his prescience in identifying past market bubbles, predicts a significant downturn is imminent. In a recent interview, he stressed that the longer a bubble inflates, the more severe the subsequent crash tends to be.

Grantham highlighted that the current valuations of U.S. stocks have surpassed the peaks seen in 1929 and 2021, trailing only Japan's bubble in 1989. He pointed to traditional metrics like the Shiller P/E ratio and the total market cap to economic value added, both indicating that valuations are at historic highs. According to Grantham, a potential 50% market correction is necessary to revert to normal valuation levels.

He expressed concern about the long-term economic implications of declining populations, suggesting that this trend could dampen "animal spirits," slow economic growth, and reduce productivity. Grantham advised investors to focus on the long-term trends and overarching societal issues.

The hype surrounding AI is, according to Grantham, not dissimilar to past technological bubbles. Highlighting historical precedents like the railways of the 19th century and the late-20th-century internet, he noted how new technologies often attract significant investment, leading to bubble formation. While he recognized technology's transformative potential, he cautioned it often results in initial overvaluation.

Moreover, Grantham underlined the importance for investors to steer clear of excessive leverage, likening its dangers to those of the 1930s. He emphasized investing in companies with low debt and substantial margins to withstand market volatility.

In addition to his market predictions, Grantham touched on the broader socio-economic issue of declining populations. He warned that this poses a significant threat to economic vitality, affecting labor and GDP growth. While immigration can partially offset these trends, Grantham asserted that long-term solutions demand societal policy changes to encourage higher birth rates.

Despite his bearish outlook on U.S. stocks, Grantham sees opportunity outside the American market. He believes that non-U.S. markets present relatively lower risks and may outperform U.S. markets over the next decade. Grantham's perspective suggests a strategic pivot towards global diversification amid concerns over domestic market valuations.