"He noted that as bull runs lose steam and bear markets set in, valuation multiples have always returned to historical averages. Yet that hasn't happened for a record 34 years now. Using the S&P 500's level at the start of this year, he calculated it would have to crash 32% to around 4,700 points for its Shiller cyclically adjusted price-to-earnings (CAPE) ratio to fall from 40 to its average level of 27 since 1990."
"The benchmark would have to collapse by 52% to about 3,300 points to return to its long-term average of 19. Burry said declines of that scale might be expected from an extreme disappointment of exuberant speculation on a capital asset buildout, referring to Big Tech companies spending eye-watering sums on data centers to power an AI revolution."
"He pointed to the boom in passive investing via index funds, partly fueled by baby boomers swapping bonds for stocks in recent decades. He underscored that market-cap-weighted indexes like the S&P drive capital to the most valuable companies, helping them to become even more valuable."
Michael Burry warns that US stocks face a devastating crash as the forces supporting elevated valuations weaken. Valuations have not reverted to historical averages for a record 34 years. Using the Shiller CAPE ratio, Burry calculates the S&P 500 would need to decline 32% to reach its 1990 average valuation level of 27, or 52% to reach its long-term average of 19. He attributes the prolonged overvaluation to the boom in passive index-fund investing and corporate stock buybacks, which have artificially supported prices by concentrating capital in the largest companies. These supporting mechanisms may falter, potentially triggering the overdue correction.
Read at Business Insider
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