Stock Market Crash Is Coming. Or Not?
Everyone's talking about a crash.
The Buffett Indicator is at 230% - highest in history. PE ratios are stretched. Shiller PE is back at dot-com bubble levels. Markets are expensive by every traditional metric.
I first wrote about stock market crash prophecies over a year ago. The warnings haven't stopped since.
And yet: SPX just hit all-time highs. VIX is at 16.90. Markets act like nothing is wrong.
So which is it? Are we heading for a crash, or is this time actually different?
Here's the case for both sides.
The Bear Case: Valuations Are Screaming
I wrote about the Buffett Indicator recently - it's at 230%, higher than the dot-com peak. Even adjusted for Fed balance sheet expansion, it's at 1.1, the highest level in 60 years.
But that's not the only warning sign.
PE ratios are historically elevated.
According to JPMorgan's Guide to the Markets, the S&P 500 forward P/E ratio is well above historical averages. And historically, high P/E ratios are associated with lower future returns.
LSEG research on "Do Valuations Predict Long-Term Returns?" examined US equities across size and style indices. The conclusion: yes, starting valuations matter. High valuations predict lower subsequent returns.
Shiller PE tells the same story.
The Shiller PE (price-to-earnings ratio adjusted for 10-year average inflation-adjusted earnings) currently sits around 41 - roughly the same level as the dot-com peak in 2000.
After 2000, the S&P 500 went nowhere for 13 years. From March 2000 to March 2013, US equities delivered essentially zero nominal returns. If you bought at the peak, you waited over a decade just to break even.
If valuations today mirror 2000, why would the outcome be different?
The Bull Case: This Time Might Actually Be Different
The problem with every valuation metric is the same: they've all been screaming "expensive" since 2018, and markets kept rising.
Why?
The Fed won't let it crash.
Kevin Warsh will be the next Fed Chair. The market expects him to cut rates aggressively and potentially implement Yield Curve Control (YCC) - capping long-term Treasury yields to keep borrowing costs low.
If the stock market starts falling, the Fed steps in. QE, rate cuts, YCC - whatever it takes. The "Fed put" isn't a theory anymore. It's policy.
The stock market IS the economy now.
Luke Gromen makes the argument that the economy can't grow without new highs in the stock market. Here's why:
Capital gains taxes are a significant portion of federal tax receipts. When markets fall, tax revenue collapses. The US is already running massive deficits. If capital gains revenue drops sharply, the deficit explodes further, forcing spending cuts or tax increases that would push the economy into recession.
The government cannot afford a stock market crash. Not economically, not politically.
So the implicit policy is: support asset prices at all costs. Keep markets elevated. Keep tax revenue flowing. Avoid the recession that a real market correction would trigger.
In this framework, traditional valuation metrics don't matter. The market doesn't trade on fundamentals - it trades on the Fed's willingness to intervene.
So What Do You Do?
Both cases are coherent.
The bear case: Valuations are at historic extremes. Every metric says future returns will be low or negative. The 2000-2013 precedent is clear.
The bull case: The Fed will intervene to prevent any significant drawdown. The political economy requires elevated asset prices. Traditional valuation metrics are obsolete in an era of unlimited central bank support.
I don't know which one is right. SPX could crash 40%. Or it could grind sideways for a decade while the Fed prints. Or it could keep making new highs indefinitely.
But here's what I do know: if the bull case is correct - if the Fed really will support markets at all costs - that has consequences.
Unlimited central bank intervention doesn't make stocks go up for free. It means currency debasement. It means the Fed expanding its balance sheet, suppressing real rates, and inflating away the debt burden.
In that scenario, US equities might stay nominally high. But real returns could be zero or negative as the dollar loses purchasing power.
The actual trade isn't long or short SPX. It's being positioned for debasement.
Gold, real assets, commodities - these are what work when central banks choose money printing over market discipline.
I'm not aggressively long or short US equities at these valuations. But I am accumulating gold.
If the crash comes, gold holds value while equities fall. If the Fed prevents the crash through intervention, gold benefits from the currency debasement that intervention requires.
Either way, at Shiller PE 41 with the Fed committed to supporting asset prices at all costs, holding hard assets seems like the right trade.