Contrarian's thoughts on where equity markets are going

Grantham believes AI fueled a new stock market bubble after the launch of ChatGPT in late 2022, benefiting many of the same “Magnificent Seven” companies—Alphabet GOOGL, Amazon.com AMZN, Apple AAPL, Meta Platforms META, Microsoft MSFT, Nvidia NVDA, and Tesla TSLA—that had been leading the market before they crashed amid rising interest rates in early 2022. The Morningstar US Market Index has gained more than 65% since its mid-October 2022 low. On the formation of a new bubble so soon after the popping of a previous one, Grantham said: “Every now and then, something really weird happens, and a guy catches the football on the back of his helmet.”

While Grantham views recent US equity returns as unsustainable, opportunity beckons elsewhere. When I asked him if he expects non-US stocks to outperform US stocks over the next 10 years, he replied “Yes, historically, they’ve tended to rotate.” That would be quite a turnaround considering that the Morningstar Global Markets ex-US Index is up only 82% during the past 10 years, compared with 238% for US equities as of this writing. Grantham’s firm GMO does see value in segments of the US market, however. It recently called US deep-value stocks “our highest conviction long-only investment idea.” Considering that the growth side of the market has trounced the value side over the past decade-plus, that’s pretty contrarian.