Meb Faber Says He's an Optimist—but He Thinks a Big Drop in Stocks Would Be ‘Totally Normal'

• U.S. stocks currently trade at a CAPE ratio in the low 40s (versus historical average of 18), making them the most expensive globally for the first time, comparable to late 1990s valuations that preceded muted returns
• Foreign and emerging markets trade at significantly lower valuations (low teens to low 20s), with the cheapest bucket of countries returning 55% last year despite being largely abandoned by investors
• Historical precedent exists for dominant markets declining: Japan fell from being one-third of global market cap in the 1980s to just 5% today after three decades of stagnation

Summary

Meb Faber, CIO of Cambria Investment Management, warns that while he remains optimistic about long-term market prospects, a 50% decline in U.S. stocks by 2030 would be "totally normal" given historical patterns.

Key Historical Context:

• U.S. stocks have returned approximately 9% annually from 1800-2025
• $1 invested in U.S. stocks in the 1800s would have grown to $4.2 million by 2025, versus $51,000 in global markets
• Faber's new book, *Investing In America: The Rise of A 250-Year Bull Market*, releases Saturday

Current Valuation Concerns:

• U.S. stocks are trading at their most expensive levels since the late 1990s
• The S&P 500's price-to-earnings ratio sits in the low 40s versus a historical average of 18
• For the first time tracked, the U.S. is the most expensive stock market globally
• U.S. stocks now represent two-thirds of world market capitalization

Investment Recommendations:

• Foreign and emerging markets show reasonable valuations (low 20s to high teens P/E ratios)
• The cheapest country bucket by valuation delivered 55% returns last year
• Faber advises diversification into foreign equities, value stocks, and real assets to smooth volatility

Market Implications:

Faber emphasizes that market cycles are natural features, not flaws, driven by human behavior and tendency to extrapolate recent experience. He notes the past 15 years of 15% annual returns have created unrealistic expectations, warning that Japan's three-decade stagnation after dominating 1980s markets offers a cautionary parallel for today's U.S. market dominance.