Stay away from US stocks, expect the AI bubble to burst, and brace for a recession, elite investor Jeremy Grantham says

• US stocks are heavily overvalued, a recession is coming, and AI is overhyped, Jeremy Grantham said.

• Stocks would have plunged another 20% or 30% in 2023 if not for the AI craze, the investor said.

• Grantham said he’s worried about foreign wars, especially when asset prices are at record highs.

Stocks are absurdly expensive and likely to struggle, artificial intelligence is a bubble destined to burst, and the economy will suffer a minor recession or worse, Jeremy Grantham has warned.

The cofounder and long-term strategist of fund manager GMO recommended avoiding US stocks in a recent ThinkAdvisor interview. “They’re almost ridiculously higher priced than the rest of the world,” he said.

“The stock market will have a tough year,” he continued. American companies’ profit margins are at historic highs relative to foreign rivals, creating a “double jeopardy” situation for stocks where both earnings and multiples could fall, he added.

Grantham, a market historian who rang the alarm on a multi-asset “superbubble” at the start of 2022, said it burst that year when the S&P 500 tumbled 19% and the tech-heavy Nasdaq Composite plunged 33%.

Stocks would have slumped another 20% or 30%, he said, but the sell-off was “rudely interrupted” by the AI frenzy in early 2023 that “changed the flight path of the entire stock market.”

The veteran investor said that “AI isn’t a hoax, as bitcoin basically is,” but predicted the “incredible euphoria” around it wouldn’t last. Still, he suggested it could prove to be as revolutionary as the internet over the next few decades.

Grantham also issued a grim forecast for the US economy, despite solid GDP growth of 3.3% in the fourth quarter, unemployment and annualized inflation below 4% in December, and the prospect of several cuts to interest rates this year. On the other hand, the inverted yield curve and prolonged declines in leading economic indicators point to trouble ahead.

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“The economy will get weaker,” he said. “We’ll have, at least, a mild recession.”

Grantham also flagged the threat posed by conflicts in Ukraine and the Middle East, warning that wars can foster a geopolitical backdrop that’s “scary as hell and in which bad things can happen.” The backdrop is especially worrying when assets are at record highs, he added.

“What I specialize in other than bubbles are long-term, underrated negatives,” Grantham said. “And my God, there’s a rich collection of negatives right now.”

The bubble guru urged investors to be careful, and recommended they seek out undervalued assets in emerging markets like Japan, depressed sectors like natural resources, and growth areas like climate-change solutions.

It’s worth emphasizing that Grantham’s dire forecasts haven’t hit the mark in recent years. For example, he suggested in April that the S&P 500 could be cut in half to around 2,000 points in a worse-case scenario, but the benchmark stock index has surged to an all-time high of over 4,900 points since then.

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