“We view the today’s circumstances as the fourth major financial euphoria of the last 100 years: 1929, 1969, 1999, and now,” Smead, who manages the Smead Value Fund (SMVLX), said. The fund has outperformed 99% of similar funds over the last 10- and 15-year periods, according to Morningstar data.

There are plenty of data points backing up Smead’s outlook. He cited one in an August 6 note: the percentage of stock holdings making up household portfolios. Right now, it’s at its highest-ever level.

Or take two famous valuation measures, for example.

The Shiller cyclically adjusted price-to-earnings ratio, which is a 10-year moving average of stock valuations, exceeds levels in 1929 and trails only its 2021 and 1999 heights.

And the so-called Warren Buffett Indicator, or total market cap-to-GDP, hovers just below its all-time highs.

The extended nature of the current market make Smead certain of one thing — the S&P 500 will perform dysmally over the next decade or longer. While valuations are poor predictors for near-term market performance, they tend to be the most important factors in deciding where stocks go in the long-term. According to a Bank of America analysis, 80% of the market’s performance over a 10-year period can be attributed to starting valuations.

“We’re completely convinced that people will not make money in the next 10-15 years in the S&P 500 index, other than for trading purposes,” Smead said.

“History bears that out,” he continued. “From ’64-71 the Dow went nowhere. And from 1999 to 2009 the S&P 500 made no money.”

But Smead has also become bearish on the near-term prospects of the market, largely due to the weight of tech stocks in the index. With poor tech-sector earnings recently, the sector has endured its worst period since 2022. From June 10 to August 7, the Technology Select Sector SPDR (XLK) Fund fell 17%.

Given the sector’s 31% weight in the S&P 500, Smead thinks its poor performance will continue to drag down the index, causing more investors to sell the index, further hurting tech stocks, and so on.

“Selling begets more selling and feeds on itself. Major stock prices begin to perform poorly, which drags down the S&P 500 Index, which in turn causes the selling of the index. The index selling puts a drag on the largest-cap stocks, which adds more legs to the index selling.”

What’s more, inflation is “entrenched” in the economy, he believes, and once the Federal Reserve begins to lower interest rates in an effort to stave off a recession, prices will begin rising more quickly again. This will hurt the market’s valuation, which currently sits at 21x earnings, well above its long-term average of 14x.

Stocks Smead is betting on

Smead’s views align him with ultra-bearish money managers like Jeremy Grantham and John Hussman, who both believe stocks are in a bubble and will deliver lackluster returns over the long-term.

While Smead may turn out to be right over the next decade-plus — a duration to which his track record lends credibility — it’s difficult to say whether his near-term skepticism about the market will play out. The S&P 500 is up 49% since late 2022 as bears have continued to warn of downside.

Stocks suffered from ongoing selling for a few days earlier this month as July’s jobs report came in cooler than expected, raising questions about the economy’s health. But the market has rebounded in recent days, and investors will wait for more data to confirm whether or not labor market deterioration is substantial.

If stocks do indeed continue to sell-off, Smead has a couple of ideas to capitalize on the downside. First, he likes homebuilders, which he believes will benefit from lower mortgage rates as the Fed gets ready to slash its overnight lending rate for the first time since its aggressive hiking cycle began in 2022.

Two in particular that Smead is betting on are DR Horton (DHI) and Lennar (LEN).

Second, lower interest rates would spark demand and could cause inflation to resurface, which would be good for oil stocks, Smead said. He has positions in Occidental Petroleum (OXY) and Apache (APA).