Stop me if you've heard this before, but money manager GMO LLC is bearish on U.S. equities. The Boston-based firm and its noted co-founder, Jeremy Grantham, have long warned that U.S. stocks are overpriced and fixing to fall. And that hasn’t happened . . . yet.

But during a presentation by one of its investment team members at this week’s Inside ETFs conference, the firm made its case that investors are too optimistic—and thus, unrealistic—about U.S. equities.

James Montier, a member of GMO’s asset allocation team, presented his company’s doom-and-gloom message in a most disarming way, what with his British accent and engaging sense of humor. But make no mistake that his intent was pure GMO; namely, that the facts don’t support current valuations for U.S. equities and that investors should look elsewhere for opportunities.

First, he noted that GMO has not been a fan of U.S. equity markets for a while, which he admits has been an “extremely painful thing to go through” for his firm. Since 2007, he said, U.S. equities have registered annual real returns after inflation of 6.8% versus 1.85% for the rest of the world.

But Montier said this outperformance isn’t the result of a gangbuster U.S. economy. He pointed out the current U.S. economic recovery since the Great Recession is both the longest—and weakest—in the post-World War 2 era. And productivity has grown slower than GDP growth. In addition, he said, real wages have barely grown at all during this expansion.

“That’s a pretty terrifying thing to say,” he added. “And the gains have been captured by a very small minority of people. The top 10% have been gathering almost all of the gains of the economic expansion . . . What we have is huge inequality, which is a huge problem in any economic cycle. This doesn’t feel like a good foundation for the type of optimism that has generated enormous U.S. equity outperformance.”

Montier noted that overoptimism is one of the common behavioral traits in the late stages of a market cycle as investors overestimate expected returns and underestimate risks. “I think that’s what we’re currently going through,” he said. “That’s a pretty dangerous combination of traits.”

To GMO’s thinking, the two main sources for the outperformance of U.S. stocks versus the rest of the world have been buybacks and valuation. The former is a massive debt-for-equity swap that’s jacking up both stock prices and corporate leverage, Montier said, while the latter has resulted more from multiple expansion than from earnings growth.

“How likely are those two sources of return going forward?” he asked.

Regarding valuations, Montier said the Shiller P/E ratio, formally known as the cyclically adjusted price-to-earnings (CAPE) ratio, is currently more than 30 times, which is roughly double its historic median. Meanwhile, the Shiller P/E ratio for the developed world, ex-U.S. is around 15 and for emerging markets it’s roughly 13.

“It seems unlikely that one would want to bet the U.S. equity market is capable of generating further expansion from these numbers,” he said.

In that vein, GMO’s seven-year asset class forecast calls for a negative 4.9% return for U.S. large-cap stocks and a negative 2.2% return for U.S. small-cap stocks.

Montier pointed to various other potential problems confronting U.S. equities, such as cash flow concerns. “Somewhere between 25% to 30% of U.S. companies are currently making losses,” he said. “That’s scary, but it doesn’t seem to frighten investors. Investors seem to want companies that don’t make money.”

He added that 52% of all initial public offerings last year had negative EPS. “That surpasses the level from even what we saw during the tech bubble,” Montier said.

For Montier, these and other stats he dispensed during his talk add up to the improbability of U.S. stocks maintaining their outperformance versus the rest of the world during the next seven years.

He concluded his presentation with a message that investors need to think differently and be contrarian about their investments in the coming years, and to not be sucked into the herd mentality of unwarranted optimism for U.S. equities.

He offered that traditional 60/40 portfolios won’t provide sufficient returns “to finance pretty much anybody’s investment expectations. So to me, that tells me you have to be different.”

“Being different is hard,” Montier continued. “Being different doesn’t come naturally.”

He offered that people face two significant hurdles that prevent them from being contrarian and non-consensus with their investments. The first is human nature, where people are social creatures by nature and there’s an inherent feeling of safety by going with the crowd. Second, our brains feel social pain the same way we feel physical pain.

“So being different and taking on that social exclusion of being ostracized or ridiculed for it is like having your hand broken on a regular basis. It’s really not tremendous fun,” Montier said.

And he posits those same tendencies permeate the realm of institutional investors; a condition captured by British economist John Maynard Keynes when he wrote: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

When it comes to investing, Montier said, in the short term there’s no difference between being early and being wrong. “It’s one of the great tragedies of the investment world,” he said, adding that it causes people to flee strategies before they have a chance to prove they were right. In turn, that causes people to chase momentum and to perpetuate the herd mentality.

Montier said he challenges investors to be different and to recognize that U.S. equities are expensive and that better opportunities exist elsewhere. He pitched emerging markets as a viable alternative; particularly emerging-market value stocks which he said are trading at about 10 times their 10-year average earnings.

“When I look at this in history . . . the only way you lose your money and don’t get it back when you buy a market that’s trading 10 times [earnings] is if that market ceases to exists—i.e., the Russian Revolution."

Now, if all this sounds like someone trying really hard to rationalize why his firm has been wrong—or as Montier would put it, early—on a call that U.S. equities are overpriced and due to tumble, well, perhaps it is. But it’s also a rational argument that brings attention to a very real concern about the fundamentals of U.S. stocks. Timing is everything in investing, and as GMO has experienced in recent years, being early on a potentially correct market bet can be painful.