U.S. equities are “grinding higher,” according to DoubleLine Capital CEO Jeffrey Gundlach. But with tax cuts looking like they will be “really hard to get done” and other headwinds, investors need to keep expectations low, the bond king said during a conference call on Tuesday.
Gundlach favors non-U.S. stocks given the “undeniably high” valuations for the market.
“Here is what’s alarming. The price-to-sales ratio of the S&P 500 has only been higher during the dot-com bubble,” he said. This means investors “shouldn’t expect a 5% gain in the S&P 500 unless sales meaningfully pick up.”
The cyclically adjusted price-to-earnings ratio for emerging-market equities is “less than half of the CAPE for the S&P 500,” Gundlach points out.
He says that the “charge into passive investing” may be partly behind this surging price level, as more and more investors put their money into S&P index funds, for instance.
“There have been no S&P-earnings downgrades” of late, supporting the market, the fixed income specialist says.
He reminded investors that contrary to what many believe, “Fed hikes are not bad for stocks, especially when you compare stocks against bonds.”
Yields on the 10-year Treasuries are likely to head down in the short term, Gundlach says, which is good news for bond prices.