Driving through Northern Alabama on Thursday, veteran investor Bill Smead was on the road pitching potential clients on his Smead Value Fund (SMVLX). It’s not an easy sell right now. His energy and homebuilder stocks have taken a hit, and the fund is down 11% since May of last year. In contrast, the S&P 500 is up 10%.
But to Smead, that’s exactly why now is the time to invest in his fund.
“Every investment discipline has its hard times, and it’s during those periods when investors make money,” Smead said.
He argues the reverse is also true:
“When an investment is soaring, the likelihood that the outperformance continues decreases.”
A Growth-Led Index at Risk?
The S&P 500 is hovering just under its all-time highs, and Smead is ringing alarm bells.
“Even though the index has been a really good idea from 1981 to now in a rising market, every investment discipline goes through cold stretches,” he explained. “The longer it goes on making people rich, the more likely it is for a catch-up period.”
Smead, a known value manager, isn’t just throwing out opinions. Over the last 15 years, he’s beaten 94% of similar funds, according to Morningstar. In 2021, while many investors chased tech stocks, he bet big on economic reopening plays and returned 40%.
Warning Signs in Valuations and Momentum
One of Smead’s biggest concerns lies in current valuations. The Shiller CAPE ratio, which compares today’s stock prices to a 10-year earnings average, is near historic highs.
A March report from Invesco supports this concern. From 1983 to 2015, the Shiller CAPE explained 78% of the S&P 500’s forward 10-year returns. The takeaway: when valuations are high, future returns tend to be low.
Smead also flags the momentum factor. Lisa Shalett, CIO at Morgan Stanley Wealth Management, noted the S&P 500 climbed 23% in 2024 — but momentum stocks surged 58%.
“That shows that a FOMO attitude is driving the market,” Shalett said, warning that prices are running far ahead of earnings growth.
Steve Sosnick, chief strategist at Interactive Brokers, echoed that view in a client note:
“One of the most powerful momentum surges that I can remember.”
This surge followed the pause on Trump’s “Liberation Day” tariffs.
But for Smead, this trend isn’t new.
“Market conditions have more or less been momentum-driven since the Great Recession stock-market bottom in 2009,” he said.
He’s seen enough to draw a stark conclusion:
“The momentum of the last 15 years is the biggest momentum market in US history — bigger than the roaring ’20s, bigger than the go-go ’60s, and bigger than the dot-com bubble in a wide variety of ways in measuring it.”
“I Don’t Trust the S&P 500 Farther Than I Can Throw It”
Smead isn’t mincing words.
“This is maybe the most dangerous market of my career, and that includes 1987’s crash, that includes the savings and loan debacle market of the early ’90s, that includes the 1999 to 2009 lost decade in the S&P 500 in the dot-com bubble,” he said. “This is the most difficult market of my 45 years.”
For now, while the broader market rides the wave of momentum, Smead is sticking to value — battered as it may be.
Because in his eyes, the danger isn’t in buying unloved stocks.
It’s in chasing the ones that look too good to fail.
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