“Speculation is rampant and being championed by a bold new breed of millennial day traders,” he said. “The mania is based on a widespread hope in Fed money printing. The catalysts for reckoning are numerous as a major cyclical economic downturn has only just begun.”
Smith used this chart of plunging S&P 500 Profit Margins to show “how insanely disconnected equity prices are from their underlying fundamentals.” He warned that buy-the-dip investors are “not paying attention and have simply been too eager to call the bottom.”
“Markets driven by euphoria never end well,” he explained in a note to clients this week.
“The U.S. stock market today is in la-la land. It is discounting a new expansion phase of the economy at the same time as a major recession has only just begun.”