Latest news with #JeffreyGundlach
Yahoo
12 hours ago
- Business
- Yahoo
Monitoring The Cape Ratio: Are Stocks Overvalued or Will the Bull Run Continue?
Amid a historic rebound, the S&P 500 has hit another all-time high after flirting with correction territory just three months ago in March. With the S&P 500 dropping more than 10% in March from its previous high of 6,144 in February, the benchmark has now rebounded and hit a new peak of over 6,180 on Friday. Such a fast recoup in the broader market is unprecedented and can sometimes take years. That said, it's certainly a worthy topic of whether stocks are overvalued or if there is indeed a clear path for a Bull market to continue. To do so, let's take a look at the Cape ratio, also known as the Shiller P/E ratio, and review the bullish sentiment that's lifting markets. Notably, the Cape ratio is used to calculate the price of the stock market or individual stocks relative to their average inflation-adjusted earnings over the last 10 years. Keeping this in mind, the Cape ratio smooths out fluctuations caused by economic cycles, providing a clearer view of whether stocks are overvalued or undervalued based on their historical average. Preluding the market correction earlier in the year, many analysts, including famed billionaire Jeffrey Gundlach, had called for a market recalibration based on the Cape ratio's reading of 38X earnings on the benchmark S&P 500, the second-highest level ever. This Clinically Adjusted Price-to-Earnings Ratio (CAPE) has roots that date back to 1934, when David Dodd and Warren Buffett's mentor Benjamin Graham proposed smoothing out earnings over multiple years in their investment book 'Security Analysis', which provided a foundational idea behind CAPE. Retroactively calculating historical earnings data for the U.S. stock market back to 1881, the Cape ratio was formally introduced by economists Robert Shiller and John Y. Campbell in 1988. Furthermore, the Cape ratio gained notoriety in the late 1990s and early 2000s, thanks to Shiller's warning of the dot-com bubble. Following the broader market's most recent and historical rebound, the Cape ratio on the S&P 500 is currently at 36X, which is once again well above its historical average of around 16-17X. Image Source: YCHARTS Despite the Cape ratio indicating stocks are overvalued, a clearer path to global economic growth has been established with the U.S. officially reaching a framework trade deal agreement with China on Friday. President Trump's 10% baseline tariff on most countries is set to expire on July 8, but has eased concerns that rattled the stock market, providing a 90-day pause on higher imposed country-specific tariffs. While this deadline is just a few weeks away, Treasury Secretary Scott Bessent has advised that most trade deals should be done by Labor Day (Monday, September 1st). Allowing more time for negotiations, the U.S. has come to a trade agreement with the U.K. as well and is in talks with other major trading partners, including the E.U., India, and Japan. Optimistically, May's jobs report and inflation data added fuel to the market rebound earlier in the month after coming in better than economists' expectations. Meanwhile, reports of an Israel-Iran truce were able to sustain this optimism, although it's noteworthy that President Trump has just gone on the record and said he is terminating trade talks with Canada at the time of this writing. While overly bullish market sentiment can sometimes be questioned as a conundrum, investors should know that this usually preludes to higher corporate earnings, the general principle that manifests in a higher stock market. Over the last decade, the earnings from the companies in the S&P 500 have grown by over 9% annually, with the index up a bullish +200% during this period. Image Source: Zacks Investment Research Considering the stock market needs higher EPS figures to ease the Cape ratio's overhyped reading, it's noteworthy that Zacks director Sheraz Mian has pointed out that S&P 500 earnings for the second quarter are currently expected to be up +4.9% from the same period last year on +3.9% higher revenues. However, Mian also points out that while negative revisions to Q2 estimates have stabilized in recent weeks, tariff uncertainty has caused estimates for the period to be under significant pressure relative to other recent periods. Inherently, for the bull run to continue, a relatively strong Q2 earnings season and better-than-expected corporate guidance will be crucial, with the Cape ratio at a very high 36X. This may certainly be the case with the S&P 500 already hitting a new all-time peak after rebounding +10% in just three months. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report This article originally published on Zacks Investment Research ( Zacks Investment Research
Mint
14-06-2025
- Business
- Mint
Gundlach Is Latest to Sound Corporate Debt Alarms: Credit Weekly
(Bloomberg) -- DoubleLine Capital has its lowest-ever allocations to speculative-grade bonds now, because valuations just don't reflect the risks. The money manager has been gradually cutting its high-yield bonds and other sub-investment-grade debt over the past two years, Jeffrey Gundlach, chief executive officer, said at the Bloomberg Global Credit Forum in Los Angeles this week. There are myriad risks, including inflation and tariffs, and investors aren't getting paid for them, he said. Spreads, or risk premiums, on US high-yield notes are around 3 percentage points now, according to Bloomberg index data. That's well below the two-decade average of 4.9 percentage points, and close to the lowest levels since 2007. At some point, there will be a selloff and it will make sense to go bargain hunting, Gundlach said. 'We want to be a liquidity provider when you get paid to be a liquidity provider — and you're not now,' he said. 'Spreads are very uninteresting in the credit market.' Gundlach is one of a series of market watchers who have expressed worries about nosebleed valuations in corporate debt. Jamie Dimon said this week that he wouldn't be buying credit now if he were a fund manager, echoing comments he made last month. Sixth Street Partners co-founder Josh Easterly has also voiced concern. These concerns are largely being shrugged off in credit markets. Valuations are high because so many investors are eager to buy now, demand that has helped new issues for high-grade US corporate bonds this year garner nearly four times as many orders as there have been bonds for sale. But still there are ample signs of trouble ahead. Last month, more debt from blue-chip companies was downgraded than upgraded, the first time that's happened since December 2023, according to JPMorgan credit strategists Eric Beinstein and Nathaniel Rosenbaum. Corporate cash levels are falling at blue chip US companies. And Israel's attacks on Iran late this week could potentially spiral into a bigger regional conflict, pushing up oil prices, and boosting inflation. By the start of next month, around $50 billion of debt will have fallen out of high-grade indexes this year due to ratings cuts, whereas only $8 billion have joined thanks to upgrades, the starkest disparity since 2020. Warner Bros. Discovery Inc. was cut below investment-grade by Moody's Ratings this week following the media company's decision to split in two. It's the fifth-largest fallen angel ever, according to JPMorgan strategists, based on debt falling out of their high-grade index. And corporate debt investors are showing at least some signs of growing more cautious. Returns on CCC bonds, the riskiest of junk debt, are lagging those of B and BB rated notes, suggesting increasing worries over the prospect of defaults. 'We're of the opinion that there's still some risks in the marketplace, that there's still unresolved issues here,' said Adam Abbas, head of fixed income at Harris Associates. 'The market may at least inject some more bouts of volatility in the future, and we need to be cognizant of that despite our fundamental view that everything structurally in credit is going to be OK.' --With assistance from Lisa Abramowicz. More stories like this are available on
Bloomberg
14-06-2025
- Business
- Bloomberg
Gundlach Is Latest to Sound Corporate Debt Alarms: Credit Weekly
DoubleLine Capital has its lowest-ever allocations to speculative-grade bonds now, because valuations just don't reflect the risks. The money manager has been gradually cutting its high-yield bonds and other sub-investment-grade debt over the past two years, Jeffrey Gundlach, chief executive officer, said at the Bloomberg Global Credit Forum in Los Angeles this week. There are myriad risks, including inflation and tariffs, and investors aren't getting paid for them, he said.
Yahoo
13-06-2025
- Business
- Yahoo
Reckoning Is Coming for US Treasuries, Says Gundlach
DoubleLine Capital CEO Jeffrey Gundlach says a "reckoning is coming" for US treasuries. "You should be thinking about increasing your allocations to non-dollar investments," he said at the Bloomberg Global Credit Forum.
Yahoo
12-06-2025
- Business
- Yahoo
Legendary fund manager sends blunt 3-word message on economy
Legendary fund manager sends blunt 3-word message on economy originally appeared on TheStreet. There's been considerable debate over the US economy this year. After delivering solid growth in 2024 that propelled the S&P 500 up 24%, worries have mounted that President Trump's tariffs scheme could fuel inflation, crimp spending, and send the economy, stocks, and bonds into a tailspin. Those favoring tariffs argue they're the best way to strong-arm manufacturing back to America, while opponents say they're inflationary impact couldn't happen at a worse time, given increasing will take time to determine who is correct. Factories take considerable time to build, and most economists think tariffs' inflation impact on business and consumer spending trends won't really be felt until later this year. There's also the chance that future trade deals reduce the tariff bite. However, that argument lost some of its strength this week when President Trump said that ongoing negotiations with China wouldn't result in lower tariffs on Chinese imports. Undeniably, this dynamic means there's significant uncertainty, and historically, that's not a great recipe for a strong economy or stock market. The potential for the US economy to cause problems for stocks and bonds isn't lost on billionaire hedge fund manager Jeffrey Gundlach, the founder of DoubleLine, a hedge fund with over $90 billion in assets under management. Gundlach recently offered a blunt assessment of the market's future, and given his professional experience since the mid-1980s, investors ought to consider his advice carefully. A flood of monetary and fiscal stimulus saved the US economy from a Covid-driven depression in 2020, but it sparked runaway inflation that forced the Federal Reserve to employ the most hawkish rate hikes since the 1980s when Fed Chair Paul Volcker won a war against skyrocketing inflation. The Fed's rate hikes worked, given that inflation has fallen below 3% from over 8% in 2022, but they've done so at a cost. The drag of higher rates has caused layoffs, lifting the US unemployment rate to 4.2% from 3.4% in uptick in joblessness prompted Fed Chair Jerome Powell to switch gears again, cutting rates last September, November, and December. However, those cuts have yet to improve employment meaningfully, and they've arguably set the stage for inflation to reassert itself. President Trump's tariff plans compound the worry over inflation. In February, he enacted 25% tariffs on Canada and Mexico. In April, he announced 25% tariffs on autos. While he's temporarily walked back the worst of his reciprocal tariffs, a 10% baseline tariff and a roughly 55% US tariff on China remain. Those tariffs pose a high threat to the US economy. Since China joined the World Trade Organization in 2001, the US and China have become increasingly entwined. Most US companies, including manufacturers, source goods from China, especially automakers and retailers whose supply chains are particularly reliant. The rising costs associated with higher import taxes will likely force companies to raise consumer prices or take a hit to their bottom line. Higher prices will likely crimp revenue growth, while smaller profit margins reduce earnings. That's not a great backdrop for higher stock prices, given revenue and profit growth are cornerstones of stock market valuation. Perhaps unsurprisingly, the situation has affected consumer confidence. The Conference Board's closely watched Expectations Index was 72.8 last month, below the threshold of 80 that often signals a looming recession. Gundlach's forty-year career managing money means he's seen a thing or two. His position at the top of one of the largest hedge funds gives him insight across sectors, industries, and asset not a fan of what's happening. And unlike during Covid, the US isn't nearly in the shape it was to prevent any future recession with stimulus, given the size of the U.S. debt pile. 'There's an awareness now that the long-term Treasury bond is not a legitimate flight-to-quality asset,' said Gundlach in a Bloomberg interview. "It's not responding to lower interest rates." If true, that would mark a major shift. Historically, global investors have sought safety in Treasuries, viewing them as essentially risk-free assets. "In the last 15 years, there have been a number of corrections in the S&P 500, and in every single one of them, when the S&P 500 goes down more than 10%, the trade-weighted dollar index goes up. This time the Dollar went down... Usually, when the Fed starts cutting interest rates, rates across the yield curve go time, the 10-year went up," noted Gundlach. More Economic Analysis: Hedge-fund manager sees U.S. becoming Greece A critical industry is slamming the economy Reports may show whether the economy is toughing out the tariffs Gundlach worries that yields on US Treasuries could rise significantly, reaching 6%. That would be good news for retirees pocketing fixed income, but it would be a major headwind for corporations and households who became addicted to the Fed's previous zero-interest rate policy, or ZIRP. "The interest expense for the United States is untenable if we continue running a $2.1 trillion budget deficit," said Gundlach. The 10-year Treasury note and 30-year Treasury bond yields are currently 4.39% and 4.88%. The 10-year Treasury yield is often used to inform mortgage rates, so a big uptick in its yields would send ripples through the housing market. He also thinks we may have seen the low in inflation for now, suggesting household budgets will get more crimped. "We're likely seeing the low point in near-term inflation," said Gundlach. Overall, Gundlach offered a blunt conclusion: "A reckoning is coming.'Legendary fund manager sends blunt 3-word message on economy first appeared on TheStreet on Jun 12, 2025 This story was originally reported by TheStreet on Jun 12, 2025, where it first appeared. Sign in to access your portfolio
