'We are in a gigantic price bubble': Famed economist warns extreme stock valuations point to negative returns ahead

Core Viewpoint - David Rosenberg, founder of Rosenberg Research, expresses a bearish outlook on the economy and markets, particularly highlighting concerns over high valuations in the S&P 500 and potential negative returns [2][4]. Valuation Concerns - The Shiller cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500 is currently around 37.5, marking it as the third-most expensive level in history, following peaks in 2021 and 2022 [3][4]. - Historical data indicates that when the Shiller CAPE ratio exceeds 35, one-year forward returns have consistently been negative [6][8]. Economic Context - The labor market is showing signs of slowing, with job growth averaging below 100,000 per month over the past four months, and a significant downward revision of 911,000 jobs added in the past year [9]. - Rosenberg emphasizes that the combination of high valuations and a weakening economic backdrop raises skepticism about the sustainability of the current market rally [4][9]. Predictive Value of Valuations - Valuations are considered reliable predictors of long-term stock market performance, with Bank of America data suggesting they can explain about 80% of market performance over the subsequent decade [5]. - In contrast, short-term performance predictions based on valuations are less reliable, but historical instances of high valuations have led to negative returns [6].