Howard Marks Issues a Market Warning
Howard Marks has a knack for cutting through market noise. His latest memo, The Calculus of Value, published August 14, 2025, offers a sober assessment of today’s market backdrop. The message isn’t panic, but it is caution: valuations are stretched, fundamentals are softening, and investor psychology is leaning toward euphoria.
Below, I break down the key insights every serious investor should take away.
Value vs. Price
Marks reminds us of the core distinction:
Value is an asset’s intrinsic earning power, driven by fundamentals.
Price is what investors are willing to pay.
The gap between the two creates opportunity—or danger.
Make it stand out
When price exceeds value, future returns compress. When price falls below value, bargains emerge. It sounds simple, but investor psychology often muddies the waters.
The Market Setup in 2025
At the start of the year, Marks noted valuations were “lofty but not nutty.” Seven months later, the data looks worse:
S&P 500 forward P/E: ~23, vs. a historical mid-teens average.
Market cap-to-GDP: all-time high.
Equity euphoria indicator (Barclays): 2x normal levels.
S&P 500 price-to-sales: 3.3x—also a record.
Make it stand out
Layered on top of these metrics is a familiar theme: FOMO-driven optimism.
2025 Market Action
This year has been volatile:
First-quarter pullback: S&P down 15% after unexpected tariffs spooked investors.
Quick reversal: From April lows, the market rallied +29%, leaving the index up 9% YTD.
Drivers: trade tensions “less bad” than feared, AI enthusiasm, and ongoing relief that U.S. assets remain the “least ugly house on the block.”
Why Marks Is Wary
Despite the rebound, Marks points out:
Economic growth looks slower.
Inflation remains sticky.
Bond yields have climbed (10-year at 4.5%).
Risk spreads in credit markets are tight.
Put bluntly: fundamentals are weaker, yet valuations are higher.
The Bull Case
Marks doesn’t ignore the counterargument:
Today’s market leaders—big tech and AI—are faster-growing, less cyclical, and less capital intensive.
Their moats are wider, their margins fatter, and their growth prospects more durable.
In some cases, “it really is different this time.”
But he also warns that investors often apply this logic too broadly, treating every company as if it were an AI winner.
His Conclusion: “Worrisome”
Marks’ framework for positioning ranges from aggressive to defensive—what he calls INVESTCON levels.
Today, he puts himself at INVESTCON 5:
Stop adding aggressive positions.
Trim riskier holdings.
Rotate into safer, defensive assets.
This isn’t a crash call. It’s a reminder that when valuations are this rich, expected returns decline, and defense becomes the smarter play.
Takeaway for Investors
Howard Marks’ Calculus of Value is clear:
Fundamentals are softer than they were in early 2025.
Prices are higher than they were at the end of 2024.
Investor psychology is exuberant, not cautious.
That mix rarely produces strong forward returns.
Bottom line: Now is the time to play defense, not chase risk.
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Risk Disclosure: This content is for informational purposes only and does not constitute investment advice. Investing carries risk, including potential loss of principal. Always consult with a professional financial advisor to evaluate your risk tolerance and financial goals before making any investment decisions.
