Is the Stock Market Poised for Crash, Correction or More Gains?

Stephanie Link, Chief Investment Strategist and Portfolio Manager, Hightower:

“The stock market is not in a bubble, but there are pockets worth paying attention to — Bitcoin and meme stocks, for example. These areas should not deter the other parts of the market where fundamentals matter and are solid.

“The glidepath is higher for the markets given the massive stimulus in place for the rest of this year and into 2022. … Since the Fed’s move is really up to [Chairman Jerome] Powell and he remains firmly dovish, I think the risks are that the economy continues to run hotter, with pockets of inflation as well. … Economically, cyclicals should continue to outperform. Better trend GDP means earnings will continue to move higher — we could see 40% earnings growth this year, 20% next, which is good for risk assets/equities.”

Ben Inker, Head of GMO’s Asset Allocation Team:

“Speculative booms are not guaranteed to end badly but they normally do and that seems to be particularly true in the stock market. We believe the timescale for the eventual deflation of the current speculative bubble is unlikely to be all that long. What form it will take is more difficult to say.

“If the whole of the market is dominated by speculators with outsized expectations, it seems likely that deflation in the obviously speculative tier will take the overall market with it. If those speculators are coexisting with investors who recognize the implications of high valuations on potential returns, the losses may be more contained to the highest fliers.

“Even in that case, the viability of the rest of the market seems to be crucially dependent on the combination of economic growth solid enough to keep corporate profitability strong and not so strong as to reignite inflationary concerns. That is a tightrope that will be far from easy for the market to navigate indefinitely.”

Bob Doll, Chief Investment Officer, Crossmark Global Investments

“Slowly but surely, the Fed will taper and eventually raise rates. At that point, the Fed will become an enemy of the stock market. In the meantime, extraordinary economic and earnings growth is a massive offset. Therefore, it seems as though the market is in a big tug of war. The tiebreaker has been the massive amount of cash sloshing around and the T.I.N.A. (there is no alternative) argument. …

“For now, the path of least resistance is higher, but as economic and earnings growth peak (about now), the market will likely enter a period of choppiness and become directionless. Eventually the business cycle will mature and inflation and higher interest rates will cause multiples to fall, creating a headwind for equities.”

Chris Brightman, Chief Investment Officer, Research Affiliates

“Exuberant retail trading has created localized bubbles — ‘meme’ stocks and electric vehicles come to mind. That said, bubbles can persist longer and go further than any sceptic might expect.

“The U.S. market is priced at a high multiple compared to history, but I wouldn’t label it a bubble, yet. Relative to the negative real yield on 10-year TIPS, the U.S. stock market may provide a respectable excess return of 3% or so. Given today’s paltry starting yields, U.S. stock and bond markets’ long-term returns will likely disappoint.”

Liz Ann Sonders, Chief Investment Strategist, Charles Schwab & Co.:

“Although I think there are many speculation-driven ‘microbubbles’ in the market, I’m hesitant to apply the term to the major averages. These microbubbles — which are largely outside traditional market leadership segments — include meme stocks, no-profitable tech stocks, some SPACs, crypto, among others.

“We have seen bear markets erupt in these from recent highs, with declines of between 20%-50% (more in the case of the meme stocks), without it yet having any meaningful impact on the overall market. That said, sentiment indicators like the put/call ratio and margin debt do suggest heightened market risk to the extent a negative catalyst emerges (candidates might be a monetary policy mistake or something virus-related).”

Larry Swedroe, Director of Research, Buckingham Strategic Wealth:

“I don’t think there’s a bubble. I wouldn’t call it a bubble, because the CAPE 10 (or the cyclically  adjusted price-to-earnings over 10 years) is around 40, to make the math easy. [The CAPE ratio is closer to 37.] So you get a 2.5% earnings yield, but the 10-year TIPS yield is about -0.8%. That’s still an expected risk premium of about 3.5%. Now that’s half of the real expected return gap between stocks and long-term bonds, which has been about 7% over the long term …

“Today, you can expect much less than that, but that’s not a bubble because there’s still a risk premium. I can’t tell you, and neither can anyone else, whether that’s too low a premium or not; there’s still a risk premium. The markets could be saying things that just don’t look very risky, but value stocks are trading at about their historical P/Es. That means with interest rates at zero, their risk premiums are much larger than they’ve been historically.