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TLDR:
Key Points:
- Jeremy Grantham of GMO warns of a “bubble within a bubble” in the U.S. stock market fueled by the AI craze.
- The AI bubble, led by ChatGPT, has interrupted the deflation of the original market bubble, causing prices to reflect near perfection despite a flawed world.
Summary:
In a recent paper, Jeremy Grantham, co-founder of GMO, highlighted the dangers of the AI bubble within the U.S. stock market. Grantham warns that the U.S. stock market is overpriced, with a Shiller price-to-earnings ratio of 34, which is the top 1% of history. Despite the potential of AI to be a powerful and world-changing technology, Grantham cautions that tech revolutions often see early massive hype and a stock-market bubble, as evidenced by the late 1990s speculation in companies like Amazon.
Grantham’s analysis suggests that the long-term prospects for the U.S. stock market look poor, with little precedent for a sustained rally starting from high valuation levels like the current Shiller P/E. He predicts that a burst of the AI bubble could lead to the deflation of the original bubble and potentially trigger a recession due to interest rate rises and excessive speculation.
On a positive note, Grantham suggests that there are still attractive investment opportunities in the U.S. equities market, particularly in quality stocks, resource equities, climate-related investments like solar stocks, and deep value sectors. He points out that the GMO U.S. Quality ETF has outperformed the S&P 500 so far this year, indicating the potential for relative strength in these sectors.
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