Stocks could see dismal returns for the next 12 years as the FOMO-fueled rally looks like it’s nearing a peak, Wall Street legend says

• Stocks could see dismal returns over the next 12 years, market vet John Hussman warned.
• The legendary investor pointed to signs that stocks are way overvalued, fueled by investor FOMO. 
• The market looks like it’s nearing a peak, he wrote in a recent note.

Stocks could end up seeing dismal returns for more than a decade, as the FOMO-fueled rally in stocks looks like its approaching its peak, according to legendary investor John Hussman.

The Hussman Investment Trust president pointed to the monster rally in stocks over the last four months, with the S&P 500 hitting a string of all-time highs already in 2024. But most of that is due to Wall Street’s “nearly frantic ‘fear of missing out,'” Hussman said in a note on Sunday — which spells trouble for stocks over the long run.

“Lots of pressures are driving that fear: the recent push to nominal record highs, enthusiasm about an economic ‘soft landing,’ an expected ‘pivot’ to lower interest rates, and most recently,e euphoria about the prospects for artificial intelligence,” Hussman said. “I do believe that current market valuations, whatever metric one chooses, are likely to be followed by weak-to-dismal 10-12 year total returns and deep full cycle losses,” he warned.

One valuation measure — the S&P 500’s ratio of nonfinancial market capitalization to corporate gross value-added — is showing that stocks are the most highly valued since 1929, when the market frothed up and collapsed prior to the Great Depression.

That valuation is most correlated with total returns for the S&P 500 for the next 10-12 years, Hussman said — a sign investors betting on stocks today could be disappointed over the long-term.

Meanwhile, the estimated 12-year nominal return on a conventional investment portfolio — which involves investing 60% of cash in the S&P 500 — has fallen below 0%. That’s the lowest estimated returns have been since the 2020 recession, when the pandemic upended markets.

“We can’t say with any certainty at all that stocks are at a market peak. We can also say with complete certainty that present conditions mirror what a market peak looks like,” Hussman warned.

Hussman, who correctly predicted the 2000 and 2008 market crashes, has been bearish on stocks for months. Previously, he warned of a “cluster of woe” facing the stock market, adding that as much as a 65% drop in stocks wouldn’t be surprising to him, though he’s refrained from making an official forecast. 

Meanwhile, recession risks are still alive in the economy, Hussman said, calling the danger of a coming downturn a “valid” concern for investors. He predicted steep rate cuts to come this year — similar to the heavy cuts the Fed made during the recessions of the early 2000s and the 2008 Great Financial Crisis. 

Those risks could be lost on investors, who are still feeling bullish on stocks as the market’s rally continues. Individual investors are the most bullish on stocks since 2007, according to one index maintained by the Yale School of Management.