Bill Smead, the Chief Investment Officer at Smead Capital Management, warned that the stock market has reached what he calls a “line of death,” which is a level last seen during the dot-com bubble. Indeed, he told CNBC that the inflation-adjusted price-to-earnings ratio has risen back to those extreme levels. Smead pointed out that the 10 biggest companies — Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Meta (META), Broadcom (AVGO), Tesla (TSLA), Berkshire Hathaway (BRK.B), and JPMorgan Chase (JPM) — are now more expensive than they were at the bubble’s peak.
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Despite this warning, Smead sees the potential for opportunities in other sectors, particularly homebuilders like those in the SPDR S&P Homebuilders ETF (XHB). He explained that these stocks typically perform best when sentiment toward housing is low, which is what we are currently seeing. In addition, any potential reduction in tariffs could help homebuilders by easing costs. It could even lead to lower mortgage rates since the Federal Reserve would be more willing to cut rates in that scenario.
Nevertheless, Smead stated that current valuations are better at showing which stocks to avoid rather than predicting short-term performance. While the market’s high prices do not necessarily mean that we will see poor returns in the next few months, he does believe that they suggest weaker returns over the next three to 10 years. This is especially true for large-cap tech stocks and index funds, which have been driving much of the recent market rally.
Which Large-Cap Stock Is the Better Buy?
Turning to Wall Street, out of the stocks mentioned above, analysts think that BRK.B stock has the most room to run. In fact, BRK.B’s average price target of $595 per share implies more than 23% upside potential. On the other hand, analysts expect the least from TSLA stock, as its average price target of $305.79 equates to a loss of 8.1%.
