Howard Marks Warns of Red Flags in the Market
Howard Marks, co-founder and co-chairman of Oaktree Capital Management, has raised concerns about several red flags in the market, including valuation, in his latest memo to clients.
Marks attributes the S&P 500’s two-year surge to a handful of stocks, particularly the "Magnificent Seven" – a group of large-cap stocks including Nvidia, Microsoft, Apple, and Meta Platforms – and notes that the enthusiasm surrounding artificial intelligence has led to overvaluation in these areas.
He points out that the current price-to-earnings ratio of 22 is near the top of the range, which would translate to 10-year returns between 2% and -2%, according to JPMorgan Asset Management data. Marks notes that this could lead to poor long-term returns or a sharp correction in the short term.
Marks also questions the phenomenon of "passive investing" and the assumption that the largest companies are too big to fail, stating that this could lead to a lack of scrutiny and unrealistic valuations.
The renowned value investor also notes that investors should not be indifferent to market valuation, citing the importance of price paid for returns on investment. He warns that a sudden and intense sell-off could occur, similar to the early 2000s internet bubble burst, if the market corrects its multiple in a short period of time.
Marks’ memo also references a quote often attributed to Warren Buffett, "When investors forget that corporate profits grow about 7% per year, they tend to get into trouble." Marks notes that he asked Buffett if he indeed said this, and though Buffett denied it, Marks plans to continue using it, as he finds it relevant.