Veteran value investor Bill Smead is sounding the alarm on the equity market’s latest surge, warning that current price levels could set the stage for a prolonged downturn.
In his Q2 investor letter, Smead presented a technical chart showing inflation-adjusted S&P 500 returns dating back to the 1960s, highlighting a trendline that has historically marked major turning points in market history.
That line, which acted as resistance during the peaks of 1966 and the 2000 dot-com bubble, has now been touched for the third time as the S&P 500 pushes above 6,300. In both prior instances, the market saw a significant multi-year drawdown after reaching that point. For advisors guiding client allocations today, Smead’s message is clear: prepare for materially lower equity returns over the next decade.
“There’s no law that says the market has to reverse here,” Smead said. “But if history is a guide, the odds are stacked against continued outsized gains.” He added that while this signal doesn’t offer precision on timing, it does suggest the magnitude and duration of a potential reversal could be severe. “It’s not a question of whether—it’s a question of when.”
Smead’s bearish view is particularly focused on the dominance of large-cap growth names, especially the Magnificent Seven, which have been responsible for the lion’s share of recent index performance. For RIAs, this concentrated leadership presents a dilemma: while client portfolios have benefited from these names, valuations are stretched, and reversion risk is rising.
As a long-term value manager, Smead’s portfolio is tilted toward the energy, consumer cyclical, and financial sectors—areas that have lagged but may offer more attractive forward-looking returns. His Smead Value Fund (SMVLX), which ranks in the top 4% of its Morningstar category over the last 15 years, has underperformed recently, down 10.6% over the past 12 months. But Smead believes that underperformance could be setting the stage for a regime shift in market leadership.
In support of his cautious stance, Smead also points to Warren Buffett’s sizable cash position at Berkshire Hathaway as another red flag. The Oracle of Omaha is sitting on a near-record cash hoard, echoing his defensive positioning prior to the dot-com collapse. While Buffett endured criticism and short-term underperformance during that late-1990s run-up, his disciplined approach ultimately outpaced the broader market when the bubble burst.
“People keep asking why Buffett is holding so much cash,” Smead said. “It’s because he understands how dangerous this setup is. This market is being priced for perfection—and perfection rarely lasts.”
For advisors, the takeaway is not to panic, but to reassess risk exposures and client expectations. The Shiller CAPE ratio is hovering near levels only seen during historic bubbles, underscoring the difficulty of generating strong real returns from today’s equity valuations. In this environment, a renewed focus on value-oriented strategies, balance sheet strength, and income generation may offer more durable outcomes.
Smead’s warning may not offer a crystal-clear catalyst or timeline, but it does offer a framework: the higher the climb, the harder the fall. For wealth managers navigating client portfolios near market highs, his perspective serves as a timely reminder to revisit asset allocations, shore up diversification, and prepare clients for a more volatile—and potentially less rewarding—decade ahead.
