(Bloomberg) -- Oaktree Capital Group LLC co-founder Howard Marks says investors who made a fortune in the era of easy money should not expect the same strategies to deliver such exceptional returns in the future.
The legendary investor weighed in on the "irrationality of markets" during the recent AI-fueled rally. He warned against overestimating the fundamentals of expensive companies at a time when the Federal Reserve is in no rush to return to the zero-interest rate era of a few years back.
"I don't believe that the next 10 years will be characterized by declining interest rates or ultra low interest rates," Marks said at the Global Alts conference in Miami known as Hedge Fund Week.
The talk was delivered just as the success of the Chinese artificial intelligence startup DeepSeek is forcing investors to question the lofty valuations of AI giants like Nvidia Corp. and related stocks.
"If it were just objective, clinical, unemotional investors looking at Nvidia, there would be no reason why yesterday's news should knock all these other things down," Marks said. "It just shows you the pervasiveness of psychology and the irrationality of the markets in the short run."
In a memo published in January titled "On Bubble Watch," the legendary investor reflected on one of the most prescient calls of his career: an essay published 25 years ago warning about the irrational behavior in dot-com stocks.
In his new writing, the Oaktree co-chairman cited cautionary signs in today's markets, including above-average stock valuations, the broad-based AI euphoria, the dominance of the so-called Magnificent 7 and the possibility that "automated" buying of large-cap stocks has kicked in "without regard for their intrinsic value."
His comments come a day before the Federal Reserve wraps up its first policy meeting of 2025. Given healthy consumer demand and still-stubborn inflationary pressures, officials are widely expected to hold borrowing costs steady. At their December gathering, policymakers signaled just two interest-rate cuts this year.
Marks referred to projections by banks, including Goldman Sachs Group Inc., that stocks may have single-digit returns in the next decade and pointed to high-yield credit as an attractive alternative.
"If you can get low single-digit returns from the S&P 500 with great uncertainty and 7.3% from high-yield bonds contractually, isn't it better?," he said. "Everybody should look at their holdings and try to make sure that the things they own, they own based on strong and improving fundamentals."
Oaktree, which has $205 billion of assets under management, has long been known for its focus on high-yield debt and distressed assets, though it also invests in credit, private equity, and real assets.
Marks has recommended that investors shift from stocks to credit in other memos he has written in recent years. So far, the markets have not followed his predictions. But US equities are at a critical juncture after two consecutive years of returns over 20%. Investors are divided on whether the outsized gains can continue against stretched valuations, especially if officials rein in expectations about how much they'll ease monetary policy.
The US stock market has been on a steady ascent since the global financial crisis, driven by near-zero interest rates and, more recently, by robust economic growth and enthusiasm about AI. The S&P 500 Index has posted an annualized nominal total return of 13% in the last decade. But Marks said that is unlikely to continue at the same pace.
"Another version of insanity is doing the same thing in an entirely different environment and expecting the same results," Marks said. "The things that worked the best in a period of declining and ultra-low rates will not necessarily be the things that work best in a period of stable and generally higher rates, and people have to accept that."
(Updates with background on Oaktree in 11th and 12th paragraphs)
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