Howard Marks, co-founder of Oaktree Capital Group LLC, stated on Tuesday that investors who made money in an era of easy profits should not expect the same strategies to yield equally excellent returns in the future.
This legendary investor weighed in on the 'irrationality of the market' during the recent rebound driven by artificial intelligence (AI). He warned not to overestimate the fundamentals of companies with expensive valuations when the Federal Reserve is not in a hurry to return to the zero-interest-rate era of a few years ago.
"I don't think interest rates will continue to decline or drop to ultra-low levels over the next decade," Marks stated at the Hedge Fund Week conference held in Miami.
At the time this speech was delivered, the success of Chinese AI startup DeepSeek forced investors to question the high valuations of AI giants like Nvidia (NVDA) and their related stocks.
"Marks said: 'If you look at Nvidia as an objective, calm, and unemotional investor, then the news on Monday has no reason not to overturn some narratives. It simply shows a universal psychological phenomenon and the irrationality of the market in the short term.'"
Since the global financial crisis, the U.S. stock market has been steadily rising, thanks to near-zero interest rates, strong recent economic growth, and investor enthusiasm for AI. The annualized nominal total return of the S&P 500 over the past decade has reached 13%. However, Marks stated that this situation is unlikely to continue.
In a memo titled 'On Bubble Watch' published in January, this legendary investor reflected on one of the most prescient expectations of his career: in an article published 25 years ago, he warned about investors' irrational behavior towards internet stocks.
In his new article, Marks cited warning signals in today's market, including above-average stock valuations, a widespread AI craze, the dominance of the so-called 'Magnificent Seven' stocks, and the possibility of 'automatically' buying large-cap stocks without considering their intrinsic value.
Marks also mentioned predictions from banks including Goldman Sachs that U.S. stock market returns over the next decade may only be in the single digits, noting that high-yield bonds are an attractive option.
He said: 'If you are only getting low single-digit returns from the highly uncertain S&P 500, wouldn’t it be better to get a contractual return of 7.3% from high-yield bonds? Everyone should examine their portfolios and try to ensure they are all based on strong and continually improving fundamentals.'
Marks has suggested in other memos written in recent years that investors shift from stocks to credit. So far, the market has not followed his predictions. However, after two consecutive years of returns exceeding 20%, the U.S. stock market is at a critical moment. Under high valuations, investors are divided on whether this strong rally can continue, especially if officials suppress expectations of interest rate cuts.
His latest comments were made the day before the Federal Reserve wrapped up its first policy meeting of 2025. Given strong consumer demand and persistently stubborn inflationary pressures, officials are widely expected to keep borrowing costs stable. At the meeting in December, policymakers hinted at only two interest rate cuts this year.
Oaktree Capital manages $205 billion in assets and has long been known for its focus on high-yield bonds and distressed assets, although it also invests in credit, private equity, and physical assets.
Article forwarded from: Jin Ten Data