Jeremy Grantham, who has consistently identified overpricing in the US equity markets – he flagged both the Dot Com bubble and the irrational pricing that preceded the financial crisis, for instance – said last week that US stocks are “a little expensive” and bonds are “disgusting.” But his sternest warning to investors concerned the longer-term threat posed by global resource constraints.
Abnormally high corporate profits are the primary reason for Grantham’s contention that stocks are overvalued. Reversion to the mean is the core expectation that undergirds his firm’s investment philosophy, and when profit margins revert to their historical averages, he argued, investors will suffer weak returns.
Grantham is the co-founder and chief investment strategist of Grantham Mayo van Otterloo (GMO), the Boston-based asset manager. His was one of the keynote presentations at last week’s Morningstar Investment Conference, held in Chicago.