“Bond King” Bill Gross says stocks are ‘dangerously overvalued’ despite AI boosts

Stocks, says “Bond King” Bill Gross, are overvalued.

August 18, 2023
“Bond King” Bill Gross says stocks are ‘dangerously overvalued’ despite AI boosts
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Matt Crabtree

Written By

Matt Crabtree

 

Stocks and long-term bonds are expensive, according to Bill Gross, and the US economy will suffer as a result.

The “Bond King” believes that stocks are overpriced when compared to risk-free assets and corporate profitability.

The Pimco co-founder believes that higher interest rates will have a chilling effect on consumer spending in the long run. 

Market overpriced?

Bill Gross has urged investors to prepare for a decline in stock prices and long-term bonds as well as a slowdown in the US economy and the UK by extension.

Simply put, he believes the market is overpriced because of the low equity risk premium and relatively high PE ratios. A wealthy investor often referred to as the “Bond King” said as much to Bloomberg last Friday.

Equities are valued at record highs compared to corporate profits, and the projected return on both stocks and risk-free assets like 10-year Treasuries is now about the same.

He warns that despite AI and upward momentum, investors should proceed with caution when it comes to stock values. This statement is similar to a warning Gross made back in July.

Shorter-term treasuries may even outperform longer-term ones

Speculation that inflation would decline, the Federal Reserve will decrease interest rates, and the economy will avoid a recession have all contributed to this year's dramatic rise in the US stock market.

While the entire effect of the Federal Reserve raising rates from practically zero to north of 5% since last spring has yet to be realised, Gross said current values still strike him as high.

Gross, co-founder of Pimco and former manager of the firm's flagship bond fund, has sounded the alarm about the possibility of shorter-term Treasuries outperforming longer-term ones.

If low-risk investments provide higher returns than high-risk ones, the financial sector cannot support a robust economy. The economy would suffer in the long run from such a distorted yield curve.

Reassessments of bonds and notes underway

According to Gross, we are returning to a more accurate assessment of bonds and notes with longer maturities.

Even though the economy has been boosted by record levels of fiscal stimulus in recent years, Gross believes it will eventually slow down.

After it is depleted, the 2% real rate will begin to have an impact on consumers and consumption, leading to reduced real GDP and inflation of roughly 3%.

After retiring in 2019 to concentrate on his own riches and private foundation, Gross expressed concern that regional banks might have similar difficulties as Silicon Valley Bank this spring. After the Federal Reserve raised interest rates, the value of lenders' bond holdings plummeted, scaring off depositors and triggering runs on many banks.

There might be issues if smaller banks haven't reduced their duration risk since then.

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