“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.