Howard Marks, a highly esteemed value investor renowned for predicting the dot-com bubble, has recently identified several warning signs in the market that hint at potential long-term low returns or even a significant short-term decline. In his latest memo to clients, Marks, who co-founded and co-chairs Oaktree Capital Management, pointed out five specific concerns with the stock market following the S&P 500’s most impressive two-year surge since 1998. Although Marks is not explicitly declaring a stock bubble—since his expertise now leans more towards credit—his memo highlights excessive market valuations as a primary issue.
Marks emphasized that the potential return on investment is closely tied to the price paid, implying that investors should be wary of the current market valuations. He cited the S&P 500’s current price-to-earnings (P/E) ratio, which stands at 22 according to JPMorgan Asset Management data. Historically, elevated P/E ratios have been linked to lower long-term returns. With this ratio near its upper range, expected 10-year returns could range between positive 2% to negative 2%. However, instead of gradual underperformance over the long term, Marks noted that any necessary correction might happen abruptly, akin to the dramatic sell-offs witnessed when the internet bubble burst in the early 2000s.
Beyond valuation concerns, Marks singled out the fervor surrounding artificial intelligence (AI). AI has surged as a dominant investment theme over the past couple of years, catapulting key players like Nvidia to staggering price heights. This excitement may have spilled over into other high-tech sectors as well. Additionally, Marks expressed unease over the belief that the seven largest companies—dubbed the “Magnificent Seven,” which includes giants like Nvidia, Microsoft, Apple, and Meta Platforms—are invincible. According to Bespoke Investment Group, these firms contributed to over half of the S&P 500’s growth in 2024, and many on Wall Street anticipate continued gains.
Marks, whose firm oversaw $205 billion in assets as of September, also questioned whether some of the S&P 500’s recent rise was due to passive investment strategies, which do not factor in value considerations. Having been writing investment memos since 1990, his insights have become essential reading for Wall Street professionals—Warren Buffett even mentioned he often reads and learns from them. Interestingly, Marks has been pondering a quote often misattributed to Buffett, which suggests that investors run into trouble when they forget that corporate profits grow roughly 7% annually. Marks clarified that he once asked Buffett about this quote and Buffett denied having said it, but Marks concluded, “I think it’s great, so I keep using it.”
