The S&P 500 is in a historic bubble and could crash by 63%, markets guru John Hussman warns

• Stocks are in a historic bubble and could crash by over 60%, John Hussman says.
• The markets guru says the S&P 500 looks very expensive and is priced to yield negative returns.

Stocks are massively overpriced and could crash by over 60%, John Hussman has warned.

"Market valuations stand at one of the three great bubble extremes in US history," rivaling the peaks of 1929 and 2000, the veteran investor and financial historian said in his latest research note. Those two previous periods of reckless speculation ended disastrously, and the current bubble is likely to unwind in similar fashion, he added.

The Hussman Investment Trust president based his bleak outlook on an analysis of stock-market returns over the last century or so. He cautioned that virtually every market cycle in history has ended with projected S&P 500 total returns returning to historical norms.

"At present, that would require a market loss on the order of -63% in the S&P 500," he wrote, raising the prospect that the benchmark stock index could fall to around 1,600 points, its lowest level since 2013.

"That's not a forecast, but it certainly is a historically-consistent estimate of the potential downside risk created by more than a decade of Fed-induced yield-seeking speculation," he continued. "Buckle up."

Hussman noted the S&P 500 is priced today for a negative return over the next 10 to 12 years. The gap in expected returns between stocks and bonds is now among "the worst levels in history," and the gauge's total return is poised to lag Treasury bond returns by about 6.5% a year for the next decade, he said.

The markets guru said stocks won't necessarily crash, but "when the bough breaks, my sense is that it may break abruptly." He bemoaned that investors have grown so accustomed to years of healthy returns that they no longer fear a major downturn, and noted they made the same mistake in the lead up to the Great Crash of 1929 and the dot-com crash in the early 2000s.

He also agreed with another bubble expert, GMO's Jeremy Grantham, that a US recession appears likely and will probably last until deep into next year. Hussman warned that the Federal Reserve's decision to keep interest rates near zero since the 2008 financial crisis is likely to exacerbate the coming economic slump.

"If we do see a recession, don't blame the Fed for the downturn," Hussman said. "Blame the Fed for more than a decade of yield-seeking speculation, and resulting financial distortions – extreme valuations, speculative losses, leveraged loans, uninsured deposits, and light covenants – that will undoubtedly complicate that downturn."

Hussman, who called the 2000 and 2008 crashes, has been warning of a disaster for a while. However, stocks have marched higher this year, fueled by excitement around AI and hopes for interest-rate cuts. The economy has also proven resilient with continued growth, low unemployment, and inflation hovering below 4% in recent months.