Michael Burry, known for predicting the 2008 housing market crash, has issued a warning about the US stock market’s current condition, highlighting its high valuations and increasing fragility. In a recent post on his Substack newsletter, Burry stated that stocks are overdue for a substantial decline and that a return to historical valuation levels could require the S&P 500 to drop significantly.
Burry pointed out that the stock market has defied the typical pattern of valuation multiples reverting to historical averages for a record 34 years. Using data from the start of the year, he calculated that the S&P 500 would need to fall by 32% to about 4,700 points to bring the Shiller cyclically adjusted price-to-earnings (CAPE) ratio from 40 down to its more typical level of 27 since 1990. A deeper correction of 52%, lowering the index to approximately 3,300 points, would be necessary to reach the long-term average CAPE of 19.
Burry suggests such declines could stem from a significant disappointment in speculative investments, particularly referencing the large expenditures by major technology companies on data centers to support AI development.
He also discussed several factors that have masked the pullback in stock prices so far. The rise of passive investing, particularly through index funds, has redirected capital increasingly towards the largest companies, reinforcing their value. Concurrently, stock buybacks by corporations have supported market capitalization levels, while regulatory actions have helped limit severe sell-offs.
However, Burry highlighted that these forces are shifting. Large tech firms are moving from stock buybacks to borrowing in order to fund infrastructure projects. Additionally, demographic changes are expected to lead baby boomers to withdraw significant stock investments due to required minimum distributions from retirement accounts beginning at age 73.
These changes, combined with an overall market environment that Burry describes as structurally more fragile and prone to interconnected risks across asset classes, increase the likelihood of a serious market downturn. He also noted rising geopolitical tensions as contributing factors.
Burry warned that the catalyst for a sharp market decline might be relatively minor, possibly triggered by disappointment in venture capital-backed companies, reduced free cash flow among tech giants, or simply the market reaching a natural turning point.
He concluded by predicting that any forthcoming crash could be more severe and prolonged than recent downturns, suggesting that recovery might be slow to materialize.
