Stocks are nearing a major peak and a more ‘disturbed’ period of weak returns is ahead for investors, CIO says

The bull market in stocks looks like it’s close to the top, according to an investment chief.

Michael Grant, the co-CIO of Calamos Investments, thinks large-cap stocks could be on track for one of the best years over the last century, before the market tips into a period defined by subpar returns.

That’s because stocks are flashing signs of “invincibility syndrome,” with investors falsely believing that nothing can stop further gains, he said in a note this week.

“The most significant feature of this investment year is the perception that US equities are virtually invincible. This ‘Invincibility Syndrome’ historically signals a crescendo when markets are in the process of summiting a major peak,” Grant wrote.

“In our view, the paradox of this rewarding year is its underlying warning of low future returns for 2025 and beyond,” he later added.

The precarious state of the market can be seen in a slew of data points that measure valuation, sentiment, and positioning, he noted.

A handful of valuation measures suggest stocks are at historically expensive levels, Grant said. For instance, the median price-to-earnings ratio of the S&P 500 is 28, the most expensive stocks have been relative to earnings since around the dot-com bubble.

Meanwhile, the standard Shiller cyclically adjusted price-to-earnings ratio — which smooths out outlier P/E data — has climbed past 35, the highest level on record.

Sentiment and position indicators are also flashing signs investors are overexcited about the stock market, Grant said.

Households appear to be the most bullish on stocks since the dot-com era. The percentage of consumers who expect stock gains over the next year has climbed to its highest levels recorded since 1987, according to the three-month moving average of responses to the Conference Board’s monthly survey.

Households also have a lot of cash allocated to investments. US households held a record $42.43 trillion in corporate equities and mutual fund shares over the second quarter, Federal Reserve data shows.

Meanwhile, the amount of cash held by non-bank investors as a percentage of equity mutual funds has dropped to nearly 30%, around historic lows. That suggests there’s little “cushion” in the event the stock market declines or experiences a shock, Grant said.

“What is striking today is how positioning measures corroborate the diagnosis of extended confidence and valuation for the leading categories of US equities. What remains to drive a market higher if everyone is already bullish?” Grant said.

Investors have felt pretty optimistic about stocks so far this year, thanks largely due to optimism on the US economy and expected rate cuts. But if the economy is headed for a soft landing or no landing at all, that suggests interest rates won’t move significantly lower, Grant noted.

“Put simply, the decline of long-term risk-free yields appears complete, unless the soft-landing assumption is badly wrong. The landscape taking shape represents the final stages of the bull market and a prelude to a much more disturbed period ahead, perhaps for many years,” he said.

Grant added that the push toward 6,000 for the S&P 500 suggests that 2024 will mark the strongest year for large-cap stocks of the century so far, but that doesn’t mean the future will be as bright.

“And yet, this thought pales in comparison with the growing evidence that we are witnessing a crescendo— a summit for equities that could prove durable.”