Bill Smead, a long-time investor known for his careful approach, has raised concerns about the sustainability of the stock market’s upward run. In a letter sent on July 15, Smead—whose Smead Value Fund has outperformed most of its competitors over the past 15 years—presented an analysis that casts doubt on the rally’s durability. His observations are based on historical trends in the S&P 500’s performance when adjusted for inflation, suggesting that the current surge may eventually be met with a significant setback.
In his communication, Smead shared a chart that tracks the inflation-adjusted returns of the S&P 500 from the 1960s onward. The graph shows a resistance trend line that touched two major peaks: one in 1966 and another in 2000. After the index reached this line in both instances, a marked decline soon occurred. Recently, the S&P 500 has climbed to record levels near 6,300—as it has now approached this critical threshold for the third time in recorded history. This recurrence of past behavior prompts a close examination of whether the rally can continue or if a major market pullback is on the horizon.
Smead acknowledged that favorable economic indicators, such as steady inflation rates, solid consumer spending, and low unemployment numbers, might support ongoing growth. He stressed that the chart serves as a stark reminder of how elevated the market has become. “That does not reveal exactly when a change might take place, yet it clearly illustrates how profound and lingering the effects could be,” he explained. He warned that waiting passively for an obvious break in the current pattern might leave investors exposed to a correction that could be both deep and enduring.
Recent market gains have been driven largely by a small group of dominant technology companies that have commanded a significant share of investor attention in recent months. As a committed value investor, Smead is cautious about relying on growth-driven factors for sustained long-term returns. His fund, which maintains a concentrated position in sectors such as energy, consumer cyclicals, and financial services, has seen a decline of 10.6% over the past 12 months. Should the market shift its focus toward value stocks, his portfolio might be positioned to benefit from a change in trend—even if the timing of that switch remains uncertain.
Adding further support to his outlook, Smead pointed to the careful stance taken by Warren Buffett in recent years. Buffett’s choice to hold a sizable cash reserve served as an early indication of potential market difficulties. During the buildup to the tech bubble, Buffett’s caution preceded a period when market returns turned sharply lower. Smead’s analysis, backed by other signals such as high cyclically adjusted earnings ratios, suggests that the currently high returns may be fragile. Investors looking to protect their capital would be wise to remain mindful of these historical patterns that have shown a tendency to repeat themselves over time.
