Bill Gross warned that investors are in for a bumpy ride as “excessive exuberance” sweeps financial markets. 

The S&P 500 Index surged above 5,200 for the first time this week, extending its gain over the past 12 months to 33%. The rally came even as the Federal Reserve’s aggressive monetary tightening pushed its benchmark rate to the highest in more than two decades and lifted 10-year inflation-adjusted yields roughly 300 basis points over the past two years.

“It tells me that fiscal deficit spending and AI enthusiasm have been overriding factors, and momentum and ‘irrational’ exuberance have dominated markets since 2022,” Gross, the co-founder and former chief investment officer of Pacific Investment Management Co., wrote in his latest investment outlook. “Buckle up for excessive exuberance.”

The comments echo those from former Fed Chair Alan Greenspan, who used the phrase “irrational exuberance” in 1996 to describe investors’ euphoria toward stocks at the time.

Even Gross has found it hard to resist the temptation of the current craze for shares linked to artificial intelligence. He said he was “whipped back and forth” over the past week by trading Broadcom Inc. — one of investors’ favorite AI-related stocks.

Unappealing Bonds
Gross, who retired from asset management in 2019, said bonds are unattractive as the US government deficit swells. At 4.2%, the 10-year Treasury yield reflects expectations that consumer price increases will cool to a 2.3% annual rate by the end of year, he says, from 3.2% now. He considers that scenario unlikely.

“Too much supply,” the one-time bond king said about the Treasury market. “I don’t understand any of the new bond gurus on CNBC when they tout bonds.”

Gross lamented how various things, in both the economy and society, have changed in the past two decades, from gasoline prices to dress codes on the beach. He noted one thing that hasn’t changed much, however: 10-year yields are at similar levels to 20 years ago.

Gross said his current bond trade is to go long two-year notes, and short five- and 10-year bonds. The so-called curve-steepening trade has been a popular play among investors betting the Fed will cut rates, a move that typically leads short-maturity notes to outperform longer-term debt.

In the stock market, Gross said one of his favorite trades —- pipeline master limited partnerships — has run its course, though he still likes Western Midstream Partners. MLPs trade on exchanges, focus on natural resources like oil and gas and offer higher yields and tax advantages. The Global X MLP ETF has delivered a 29% total return in the past year.

Gross also said investors should avoid trying to catch a “falling knife” on regional banks until the Fed cuts rates later this year. He singled out Truist Financial Corp. as being relatively attractive because of it low exposure to commercial real estate.

This article was provided by Bloomberg News.