Billionaire investor David Einhorn remains one of the most closely watched figures in hedge fund investing. His firm, Greenlight Capital, follows a strategy of buying undervalued stocks while shorting overvalued ones, aiming to profit from major economic trends rather than simply tracking the market.
That approach has led to results that “look meaningfully different from the overall market in any given year.” One of Einhorn’s most famous trades was his decision to short Lehman Brothers in 2007, a move that paid off during the financial crisis.
However, performance since then has been uneven. The fund “has mostly underperformed the S&P 500 since then, with a lone standout performance coming amid the 2022 bear market.” Despite that, Greenlight Capital has still managed to deliver “total average annual returns of 12.7% since its founding in 1996,” compared to the S&P 500’s “yearly average 10.2% return” over the same period.
Because of that long-term track record, Einhorn’s recent comments on market risk have drawn attention.
“The Most Expensive” U.S. Market He Has Ever Seen
In his latest letter to investors, Einhorn issued one of his strongest warnings yet about equity valuations. He wrote:
“We believe that the U.S. equity market is the most expensive we've seen since we began managing money, and arguably in the history of the United States.”
He added that concerns go beyond just technology stocks:
“It isn't just our skepticism about AI stocks; speculative behavior among retail investors is palpable.”
From a longer-term perspective, Einhorn concluded:
“We still believe that this is not a great time to have a lot of equity exposure.”
Greenlight Capital was founded in 1996, during the buildup to the dot-com bubble. At that time, “many unprofitable stocks traded for billions of dollars,” and valuation metrics reached extreme levels.
Valuation Metrics Near Dot-Com Bubble Extremes
During the late 1990s, “the S&P 500 forward price-to-earnings (P/E) ratio climbed above 24,” while the CAPE ratio rose “above 44 in late 1999.” Today, valuations are once again elevated.
Currently, “the S&P 500 trades for a forward P/E is about 22 and its CAPE ratio exceeds 40 — both very high levels historically.” Historically, when these metrics are elevated, “lower market returns tend to follow.”
Another indicator also points to stretched valuations. The Buffett Indicator, which compares total market capitalization to gross domestic product, “peaked at 144% in March 2000,” while “70% to 80% is considered favorable.” Today, “the Buffett Indicator now stands about about 224%.”
Warren Buffett himself has said the indicator is “the single best sign of an overvalued market.”
AI Spending Could Lead to “Capital Destruction”
Large, fast-growing artificial intelligence stocks now dominate major indexes, contributing heavily to today’s valuation levels. Expectations that these companies will rapidly grow earnings have “pulled up the valuation of the entire market.”
Einhorn, however, sees risk in the massive investment required to support AI growth. According to the letter, capital spending by AI leaders “amounting to hundreds of billions of dollars per year” could result in “immense capital destruction.”
He warned that companies are likely to “overbuild capacity in an attempt to stay ahead of the competition,” a pattern that “has repeated itself in every major technological boom in history, including the dot-com bubble.”
Retail Speculation Raises Additional Concerns
Beyond large-cap AI stocks, Einhorn also highlighted speculation among individual investors. While he has concerns about AI valuations, he noted that “the valuations of many smaller companies, even those unrelated to AI, have also climbed.”
Those valuations, he suggested, “could be even less reasonable.”
Similar concerns have been raised by other prominent investors. Howard Marks of Oaktree Capital Management has warned that many stocks are rising based on “speculation that AI will eventually improve productivity and profits,” rather than current fundamentals.
Does This Mean Investors Should Exit the Market?
Einhorn’s statement that “this is not a great time to have a lot of equity exposure” reflects the nature of hedge fund investing. His strategy is designed to perform differently from the broader market.
For most investors, simply matching the market can still be effective. Investing in “a simple, broad-based index fund,” even during periods of high valuation, “isn't an irrational strategy.” Stocks have remained resilient despite years of valuation warnings.
As Peter Lynch famously noted:
“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”
Selective Opportunities Still Exist
Despite broad concerns, Einhorn noted that value opportunities remain. In his letter, he highlighted new Greenlight purchases, including “natural gas specialist Antero Resources, footwear distributor Deckers Outdoor, and payments processor Global Payments.”
With speculative behavior increasing, “right now might be a great time to focus on value stocks.” The article notes that value investing can allow portfolios to “participate in the upside while maintaining downside protection.”
However, even value-focused funds may include “lower-quality stocks that deserve a low valuation.”
Preparing for Risk Without Missing Opportunity
Einhorn has previously shown skill in positioning for bear markets, but his history also includes “preparing for bear markets that never materialize and making big bearish bets that don't work out.”
As a result, investors are encouraged to be “mentally and financially prepared for a pullback in stock prices,” but not “at the expense of missing out on the potential for continued gains
