Legendary hedge fund trader on the S&P 500 price-to-earnings ratio for U.S. stocks: It will be very hard for anyone buying the broad market to profit in the coming years

Billionaire hedge fund manager Paul Tudor Jones recently gave an interview, voicing concerns about issues such as AI regulatory loopholes and the valuation bubble in U.S. stocks. He directly said that the “disrupt and iterate” model followed by the AI industry is a bet that could cost the lives of hundreds of millions of people; at the same time, the U.S. stock market capitalization-to-GDP ratio has surged to 252%, a historic high. He believes that the traditional strategy of holding a broad-market index long term is virtually destined to lose money at today’s price-to-earnings multiple.

Liquidity above all: Fight for survival in the trading market with a boxer’s mindset

The trading philosophy of legendary macro trader Jones comes from a wealth-destroying episode he witnessed firsthand. In the 1970s, the oil tycoon Bunker Hunt hoarded large quantities of silver, and his net worth once reached as much as $11 billion. However, after the exchange set rules allowing only the market to be closed out (covered), the silver price collapsed from $50 per ounce to below $10 within just eight weeks, and Hunt ultimately went bankrupt due to a lack of liquidity.

Jones was deeply impressed by that story, and it led him to treat his grandfather’s advice as gospel: “Your true value depends only on how many checks you can write tomorrow.”

In response, Jones turns the everyday talk of traders into boxing metaphors. He said that truly good trading opportunities don’t come along very often; most of the time, a trader’s job is to patiently probe, gather information, and wait for the market to become imbalanced. This includes policy missteps by central banks, excessive government intervention, and extreme shifts in market sentiment.

He gave examples, such as going long on Bitcoin when the Federal Reserve carried out large-scale money printing in 2020, and shorting two-year U.S. Treasuries for two years when the Federal Reserve was excessively easing in 2022—saying that opportunities like these are “the timing to throw punches.” His fund’s correlation with the S&P 500 has stayed at negative 0.12 for as long as 40 years, showing that most of his returns come from pure personal Alpha, with little to no relation to the overall market’s rise and fall.

U.S. stock P/E is too high—“buy the broad market and hold long term” may be hard to profit

Jones also pointed out that the ratio of total U.S. stock market capitalization to GDP has reached 252%, far higher than 65% on the eve of the 1929 crash and 170% at the peak of the 2000 internet bubble.

He warned that if the market mean reverts to the average P/E levels from the past 25 to 30 years, the stock market will face a 30% to 35% drop. And because the share of Americans’ personal stock holdings is currently at an all-time high, such a drop would mean erasing wealth equivalent to more than 80% of U.S. GDP—triggering a cascade collapse:

A capital gains tax accounting for about 10% of U.S. tax revenue would be dramatically reduced; the fiscal deficit rate would set off alarms first, and then the bond market would also be severely hit.

Facing the mainstream strategy in the market—“buy the S&P 500 index and hold long term”—Jones cited historical data to say that if you buy at a current P/E of about 22x for the S&P 500, the expected rate of return over the next 10 years will be negative. He emphasized that the reason the S&P 500 performs so well over the long term is because it’s an average across a century, which includes many periods when the P/E was undervalued at only 6 to 8 times—so this is not a time point suitable for making major allocations.

(Understanding how to hedge is the true path to staying robust! Exposing the index-investing “sure gains, never losses” myth—how should investors respond to the Taiwan Strait crisis?)

AI regulatory gaps could lead to disaster—Jones calls for global legislation

On AI issues, Jones believes that while the tech industry has long followed an innovation model of “build, break, iterate (build, break, iterate),” it may be acceptable in other areas, but the scale of risk brought by AI is unprecedented for humankind. Once “disruption” happens, the cost could be counted in hundreds of millions of lives.

He cited the history of nuclear weapons, saying that after 1945 when the atomic bomb was dropped and the nuclear age began (atomic age), the U.S. government took only one and a half years to establish an “Atomic Energy Commission” to begin regulation. Yet more than three years have passed since AI exploded into the application layer, but a concrete regulatory framework is still missing. He called on the U.S. government to immediately convene countries to jointly build a global regulatory mechanism to prevent catastrophic consequences.

“I want to know what a real human being is, and what isn’t. Once this is settled, then the whole society can have trust.”

(Palantir releases a 22-point “Technology Republic Declaration”: AI’s military forces are inevitable—calling for universal national service)

This article, Legendary hedge fund trader talks about U.S. stocks’ P/E: It will be hard for people who buy the broad market to profit in the coming years, was first published on Chain News ABMedia.