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In an exclusive interview with Insider, Ray Dalio said he expects a period of weak returns in stocks.
He said low interest rates are fueling a bubble that will eventually burst.
Major Wall Street banks are bullish on the direction of equity markets, however.
With the Federal Reserve pinning down interest rates, return-hungry investors have turned to stocks for the income bonds would have provided in a different era. But with all of this appreciation in stocks, little upside potential remains, according to legendary investor Ray Dalio.
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John Hussman is calling for a 65-70% drop in the S&P 500.
He says he sees fresh deterioration in a key market indicator.
His comments come as stocks sit at record highs amid euphoric investor sentiment.
Investors are by now conscious of the heightened risk of a stock-market pullback in the near future, given the euphoric speculation that has continued to drive valuations upwards.
Eighty-nine percent of financial professionals surveyed by Deutsche Bank earlier this month said that they saw bubbles in financial markets, and Bank of America and Charles Schwab both recently warned that investor sentiment is approaching extremes, making stocks vulnerable to a sell-off.
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Stock indexes have recovered to record highs over the past 11 months.
But some smaller and more economically sensitive stocks have not reached their pre-pandemic levels.
Goldman found 22 stocks still below February levels with higher expected earnings than in 2019.
Markets have roared back to new highs since bottoming 11 months ago.
But index gains have been driven largely by megacap tech stocks that have benefited from a stay-at-home environment. Meanwhile, some smaller and more economically sensitive stocks have yet to reach their pre-pandemic levels as earnings have stalled.
That could change in 2021 as COVID-19 vaccines continue to be distributed, with the rollout presumably easing lockdown measures and setting the stage for a momentous economic comeback.
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Bank of America s Bull & Bear indicator showed sentiment climbed on a 1-10 scale to 7.1 last week from 6.7 on December 17.
This prompted Bank of America s chief investment strategist, Michael Hartnett, to say in a January 7 note that investors were rationalizing increasingly irrational price action on Wall St.
Hartnett laid out six warning signs to watch that could signal a bear market is beginning.
Investor sentiment has climbed from rock bottom in March to what is now approaching extremes on the other end of the spectrum and it s starting to worry Bank of America s top strategist.
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Market strategist Sven Henrich, who warned of the crash before it occurred in February 2020, says we are staring at the largest valuations and technical disconnects ever.
He said the difference between current price levels and exponential moving averages shows stocks are again due for a pullback.
On February 20 last year, right at the market s top, Sven Henrich reiterated a warning. From my perch this market is the most dangerous we ve seen since 2000, Henrich, the founder of NorthmanTrader, wrote in a post on his site.
Over the course of the following month, the market would go on to shed 35% of its value as the global pandemic worsened.