Resist the temptation to close your eyes and buy into this S&P rally, advises hedge-fund legend

By Jules Rimmer

One concern for Paul Tudor Jones is that the anticipated wave of IPOs could come at the cost to stock-market-supportive share buybacks

Hedge-fund legend Paul Tudor Jones's trading strategy is not to try to beat the market every day but to strike big targets selectively.

Given that the S&P 500 SPX has more than tripled in the last 10 years, it's understandable that some investors might think of the U.S. equity-market benchmark as a "close your eyes and buy" proposition.

Paul Tudor Jones, the billionaire hedge-fund manager who founded Tudor Investment Corp. in 1980, thinks those investors would be mistaken. "The problem is," he cautions, "when you buy the S&P at this current valuation, the forward returns are frequently negative." Taking a 100-year view, the close-your-eyes-and-buy approach might work, but, at this juncture, it also may not.

Jones was discussing his career, his routine and his investment philosophy in a conversation with Patrick O'Shaughnessy on the "Invest Like the Best" podcast that was released on Tuesday but recorded in February.

"Valuation matters," Jones continues in the podcast conversation, "and the stock market's really high, and it's going to be really hard to make money from here, I think, with any kind of long-term view."

Jones observes that it isn't necessarily high valuations that have caused market crashes historically. Looking back over the last five decades or so, Jones cites "accidents" like those of 1987, 1998, 2000 and 2008 as the result of excess leverage. "Portfolio insurance strategies" triggered the 1987 crash, while the Long-Term Capital Management default of 1998 that posed a systemic risk to the world financial system was the result of massive, derivative-heavy balance sheets, he explains.

The collapse in 2020 of internet stocks and then the market more broadly ranks as 'the easiest bear market I've ever seen in my whole life.'Paul Tudor Jones

Jones stresses that the 2000 bear market was a different animal and "was the easiest bear market I've ever seen in my whole life." After huge equity issuance in the years preceding, there was a tidal wave of IPO lock-up periods expiring that created a never-ending cascade of selling, Jones recalls.

From the archives (April 2021): Financial crises get triggered about every 10 years

Worryingly, Jones draws a close analogy with the present-day situation as he expects the deluge of planned IPO issuance this year, in the form of SpaceX, Anthropic and OpenAI, to inundate the market completely. With top tech companies shifting their cash flow toward heavily artificial-intelligence-fueled capital expenditure, the buybacks that have supported the market for so long will diminish. Much of the funding for these giant floats will come from sales of existing tech holdings, Jones predicts.

Whereas corporate buybacks acquired 3% of market capitalization for the last decade, Jones warns the trend will reverse and equity supply will boom.

From the archives (December 2017): Share-buyback machine now in overdrive - dropping a strong hint at what CEOs plan to do with tax savings

Elaborating on the excess leverage he detects in the stock market right now, Jones cites the so-called Buffett indicator, which expresses the ratio between the market cap of the S&P 500 and GDP. At present, it's at 252%. Compare that with figures of 170% in 2000 and 65% in 1929. A reversion to the mean of the last three decades would imply the index's declining in value by a third.

Furthermore, Jones is alarmed by the swelling holding of private equity in institutional portfolios. It now accounts for a 16% weighting, versus 7% in 2008.

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Jones's theory is that major investment returns aren't generated by constant activity but rather by big, selective bets on "high-materiality opportunities" arising from market imbalances. He's always on the lookout for situations wherein a government or a central bank makes a mistake that can be exploited.

Scanning the market for such scenarios right now, Jones senses an opportunity in Japan, where he expects the new prime minister, Sanae Takaichi, to affect significant economic change that could create a "catalytic moment" with the yen (USDJPY), which Jones views as "grossly undervalued."

Interestingly, the last two such opportunities in which he felt this sensation, he says, were with bitcoin (BTCUSD) in the 2020, when its appeal as the best inflation hedge (owing to its finite supply) became apparent to him, and in 2022, when he shorted 2-year U.S. Treasurys BX:TMUBMUSD02Y as he felt the Fed had lost its grip on inflation.

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-Jules Rimmer

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04-28-26 0926ET