GMO is a Boston asset manager co-founded in 1977 by Jeremy Grantham with Richard Mayo and Eyk Van Otterloo, known for valuation-driven dynamic asset allocation built on long-horizon mean reversion. Grantham is famous for calling historic bubbles, warning publicly ahead of both the 2000 dot-com crash and the 2008 financial crisis. Flagship publications include the GMO Quarterly Letter (now written by Asset Allocation co-heads Ben Inker and John Pease), Grantham's Viewpoints essays and the 7-Year Asset Class Forecast.
This is investor Jeremy Grantham clarifying a common misunderstanding: he didn't say high valuations are permanent. He still believes U.S. profit margins and price-to-earnings ratios (a measure of how expensive stocks are) will eventually fall, but much slower than before—taking 20 years instead of 7, and only returning to two-thirds of historical averages. For ordinary investors, this means the S&P 500 might deliver only 2.7% real annual returns over the next 20 years, far below what many expect. Worth reading because it explains why long-term investing may not bring quick rebounds and why markets could face slow, grinding compression rather than a sudden crash.
Jeremy Grantham, in a GMO report, refutes media misinterpretations of his views, reiterating that he still believes the U.S. market will revert to its historical mean, but at a significantly slower pace. The core argument is that due to factors such as Federal Reserve policy (including moral hazard)
This chapter is Jeremy Grantham's formal response to media misinterpretations of his views. Earlier reports claimed he believed high valuations would persist indefinitely and that mean reversion had ended—Grantham now clarifies his position. He reiterates that profit margins and price-to-earnings ratios in the U.S. market will still revert toward historical averages, but the pace of reversion has slowed significantly, driven by the stickiness of multiple structural factors.
Grantham's central judgment is that mean reversion is not dead, but its speed has lengthened from the typical 7 years observed between 1900 and 1997 to 20 years, and even then, it will only revert to two-thirds of the old normal. He emphasizes that despite two 50% crashes (the 2000 tech bubble and the 2008–2009 financial crisis), the market has failed to return to the old normal of a 15x P/E ratio, instead stabilizing around a new normal of 23x. The current market lacks the behavioral indicators of a true bubble, but if a severe bear market occurs, the market is more likely to recover to 23x rather than 15x.
| Indicator | Old Normal (1900–1997) | New Normal (Current Expectation) |
|---|---|---|
| Mean Reversion Cycle | 7 years | 20 years |
| Reversion Magnitude | Full reversion to historical average | Only two-thirds of the old normal |
| P/E Equilibrium Level | 15x | 23x |
| S&P 500 Real Annualized Return | — | 2.7% (next 20 years) |