Wealth advisors and registered investment advisors (RIAs) are accustomed to navigating complex markets, but Bill Smead—founder of the Smead Value Fund—offers a sobering perspective that cuts through the noise.
Smead describes the current landscape as perhaps the “most dangerous market” of his career, advising against investing in the S&P 500 at a time when momentum-driven gains fuel its rally.
A Cautious Perspective on Market Momentum
“I don’t trust the S&P 500 farther than I can throw it,” Smead candidly told Business Insider, highlighting his deep skepticism of the current market dynamics. His fund, heavily invested in energy and homebuilding sectors, has faced a challenging 12 months—dropping 11% as the S&P 500 climbed 10%. Yet, for Smead, this divergence underscores the importance of patience and discipline.
“Every investment strategy endures tough stretches,” Smead notes. “It’s in these moments that investors truly make money. Conversely, when investments soar, the chances of sustained outperformance diminish.”
His warnings come at a time when the S&P 500 sits near historic highs, bolstered by years of rising momentum. “The longer an index generates wealth, the more likely it is to experience a correction,” he says. For wealth advisors tasked with preserving and growing client assets, this perspective is both a warning and a call for diversification.
A Proven Track Record and Value-Driven Philosophy
Smead’s skepticism isn’t rooted in pessimism but in decades of success as a value manager. Over the past 15 years, his fund has outperformed 94% of its peers, according to Morningstar. In 2021, the Smead Value Fund delivered a remarkable 40% return by focusing on undervalued economic reopening stocks while avoiding overhyped tech plays.
Advisors familiar with Smead’s strategies know he emphasizes fundamentals over trends. His long-term success lends weight to his concerns about the S&P 500, where valuations have reached precarious levels.
Valuation Warnings: The Shiller CAPE Ratio
At the heart of Smead’s caution lies the Shiller cyclically adjusted price-to-earnings (CAPE) ratio, which currently ranks among its highest levels in history. The metric—a reliable predictor of long-term market returns—indicates that high valuations often precede periods of low returns. From 1983 to 2015, the CAPE ratio explained 78% of the S&P 500’s forward 10-year returns, according to Invesco. This historical context bolsters Smead’s view that the market’s recent gains are unlikely to persist.
The Momentum Factor: A Cause for Concern
Another red flag for Smead is the market’s reliance on momentum. Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, observed earlier this year that while the S&P 500 rose 23% in 2024, the momentum factor surged 58%. “This shows that FOMO is driving the market,” she explained, noting a disconnect between price growth and earnings growth.
Steve Sosnick, Chief Strategist at Interactive Brokers, echoed this sentiment, describing the current surge as “one of the most powerful momentum-driven rallies in memory.” For wealth advisors, these insights highlight a critical need to scrutinize the forces behind the market’s ascent and resist the temptation of chasing performance.
Lessons from Market History
Smead contextualizes the current market by comparing it to previous periods of excessive momentum. “The last 15 years represent the largest momentum market in U.S. history—bigger than the roaring ‘20s, the go-go ‘60s, or the dot-com bubble,” he asserts. This comparison serves as a stark reminder of the risks inherent in momentum-driven strategies.
His experience spans several market crises, including the 1987 crash, the savings and loan debacle, and the 1999-2009 “lost decade” following the dot-com bust. Yet, he believes today’s environment is uniquely challenging. “This is the most difficult market of my 45-year career,” he states.
Opportunities in Value Investing
For wealth advisors seeking alternatives, Smead’s value-oriented approach offers a compelling roadmap. By focusing on fundamentally strong companies trading at reasonable valuations, his strategy avoids the pitfalls of overpriced growth stocks. Smead’s conviction in sectors like energy and homebuilding reflects his belief in their long-term potential despite recent underperformance.
Advisors can draw on Smead’s insights to guide clients toward strategies that prioritize resilience over short-term gains. As momentum-driven markets lose steam, value investing’s appeal grows stronger. Smead’s emphasis on discipline, patience, and fundamentals provides a framework for navigating these turbulent times.
The Role of Wealth Advisors
Navigating today’s market requires a nuanced understanding of risk and reward. Smead’s warnings about the S&P 500 serve as a timely reminder for advisors to revisit client portfolios, assess exposure to momentum-driven assets, and explore opportunities in undervalued sectors.
The path forward demands a focus on education, clear communication, and proactive portfolio management. By aligning investment strategies with long-term goals and market realities, advisors can help clients weather the storm and capitalize on emerging opportunities.
As Bill Smead continues to champion the virtues of value investing, his message resonates: The most dangerous markets often hold the greatest opportunities for those who approach them with discipline and foresight.
