Larry McDonald: S&P 500 Could Crash 30% Over the Next Year

Apple

Across the shows: 10 speakers in other episodes, 2 bullish and 9 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportBearish

  Apple at about 10x sales is far above its 2-6x sales range of the past thirty years, so the stock is overvalued.

  He compares Apple's current multiple of roughly 10 times sales with its trading range of 2-6 times sales over the last thirty years. He questions what new product could justify a multiple that far above history. He also says a 2.55% Apple bond trading at 47 cents on the dollar is a better risk-reward than the equity at this valuation.

  “You can't buy stocks that are trading at 10... You know, Apple at 10 times sales. For thirty years, traded between two to six times sales.”at 24:01

• Larry McDonald · The Bear Traps ReportBearish

  Apple at $5 trillion looks overvalued; a rate spike would hurt consumer demand; buy two-year puts.

  Larry asks why Apple is at $5 trillion while consumer-facing names like McDonald's, Home Depot and Harley-Davidson are down about 35%. He pairs buying Apple bonds near 47 with two-year puts on the stock, arguing that a 1-2% rise in rates would decimate the economy and kill Apple stock because it sells to consumers.

  “Why is Apple at $5,000,000,000,000? ... So if the bonds are 47, the only way that bond goes to 40 is if interest rates go up another one or 2%. That would decimate the economy. That would kill Apple stock.”at 41:24

Nike

Across the shows: 6 speakers in other episodes, 3 bullish and 3 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportBullish

  Nike is a capitulation buy: down 75-80%, about $3B of free cash flow, and 30% below its 200-month average.

  Nike is 75-80% off its highs, with about $3B of free cash flow expected over the next year against a market cap of about $51B. Trading volume in the latest week was about 360M shares against a float of 1.1B, which he reads as category-five capitulation. He says the stock is 30% below its 200-month moving average, and that the 2028 Olympics is a future catalyst.

  “the capitulation score that we're getting in Nike is category five... When you can buy a world class brand that's trading 30% below its two hundred month moving average”at 9:49

Bank of America

Across the shows: 3 speakers in other episodes, 0 bullish and 5 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportBearish

  Bank of America faces deposit flight and commercial real estate losses from higher rates, and he sees shorts building against it.

  The bank holds commercial real estate loans made at 2-3% that could refinance at 7-10%, and has about $300B of deposits paying zero. He says AI assistants from Meta will show savers that they can earn around 4% in Treasuries. That should move about $150B out of Bank of America over the next year, maybe five years, which would hit a large part of its profits. He says many players are already shorting the stock.

  “they're sitting on all that commercial real estate... A 150,000,000,000 is gonna leave Bank of America over the next year, year, maybe five years, and that's a huge juicy part of their profits.”at 13:06

Meta Platforms

Across the shows: 47 speakers in other episodes, 44 bullish and 22 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportBearish

  Meta is burning its monopoly cash flow on free AI products with no barriers to entry, and free cash flow turns negative.

  Meta had about $40B of free cash flow two years ago from a business with near-monopoly power in Facebook and Instagram. He says it lost about $300B on the metaverse and is now spending heavily on AI. He expects free cash flow to turn to about negative $20B. He argues that Meta's Muse product has no barriers to entry, since Google and Apple have rival offerings, so Meta will not capture the value of AI.

  “The $40,000,000,000 free cash flow two years ago... Now they're gonna go negative free cash flow minus 20,000,000,000.”at 14:54

SLB

Across the shows: 4 speakers in other episodes, 4 bullish and 0 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportBullish

  Schlumberger owns valuable operating data, so the data moat could let its stock double or triple over five to ten years.

  He says the winners from AI are companies that own proprietary data, which becomes the moat once commodity AI tools are free. Schlumberger has that data in oilfield operations. On that basis he says the stock could potentially double or triple over the next five to ten years. He frames it as a company that can capture AI value that the big platforms cannot.

  “Schlumberger, I think the stock could potentially double, triple the next five, ten years.”at 16:06

Intuitive Surgical

• Larry McDonald · The Bear Traps ReportBullish

  Intuitive Surgical owns surgical data, and robotic surgery share could rise 500-600%, making it a long-term winner.

  He expects the share of surgeries done robotically worldwide to rise by roughly 500-600%. He argues that the company that holds the data from those procedures will capture the AI benefit. On that logic Intuitive Surgical is one of three companies he is picking to harness AI.

  “the percentage of robotic type surgeries globally are going to probably go up like five hundred, six hundred percent. But if you have the data, that's where you can really absolutely capitalize on artificial intelligence.”at 16:06

NVIDIA

Across the shows: 39 speakers in other episodes, 34 bullish and 12 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportBearish

  Nvidia is overcharging for chips, and older-generation chips will get cheaper, so the stock gets cut within two to three years.

  He argues Nvidia is taking share from rivals and charging high prices. As newer chip generations arrive, older chips will get cheaper and that pricing will erode. He sees Nvidia as one of the mega-cap names that are over-owned through the index, and expects a cut within about two to three years.

  “they're ripping off all these other guys with chips, and they're overcharging now. And, eventually, the new generations of chips, the older chips are gonna get cheaper and cheaper and cheaper. And NVIDIA is gonna get cut in the next, like, two, three years.”at 24:01

Circle Internet Group

• Larry McDonald · The Bear Traps ReportBullish

  Circle's stock is up from a $62 trade alert, and the Clarity Act would push money into stablecoins and benefit it.

  His firm made a trade alert on Circle at $62 earlier this year and the stock has moved into the nineties. He argues that if the Clarity Act passes in Washington, it would channel money into stablecoins, which hold Treasury bills. That would benefit the main stablecoin issuer.

  “Look at Circle Equity. Right? We did a trade alert at 62 this year. It's up into the nineties. If the Clarity Act passes in Washington, they're gonna basically start to force money into stablecoins.”at 27:44

iShares 20+ Year Treasury Bond ETF

Across the shows: 5 speakers in other episodes, 2 bullish and 2 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportBullish

  Long-dated Treasury ETF TLT is a buy; a countertrend bond rally could return 10-30% with coupons.

  Larry says a countertrend rally in TLT and bond prices between now and next year could return 10-30% including coupons. His firm is starting to buy TLT again, treating the move as a rally within a bond bear market driven by Treasury cash management.

  “Look at the TLT. That's something we're starting to look at and buy again. ... if you get a countertrend rally in the TLT and in bond prices between now and, say, the time next year, you could potentially make with the coupons 10, 20, 30%.”at 38:50

PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund

• Larry McDonald · The Bear Traps ReportBullish

  Long zero-coupon Treasury ETF ZROZ is being bought for a bond rally worth 10-30%.

  Larry is buying ZROZ alongside TLT because a countertrend rally in bond prices between now and next year could return 10-30% including coupons. He sees the bond market as in a bear market, with Treasury actions able to push prices up for a period.

  “The ZROZ, because if you get a countertrend rally in the TLT and in bond prices between now and, say, the time next year, you could potentially make with the coupons 10, 20, 30%.”at 38:54

Antero Resources

• Larry McDonald · The Bear Traps ReportBullish

  Antero is cheap: 8-10% free cash flow yield funds 10-15% buybacks, better risk-reward than AI.

  Larry says natural gas companies, including Antero and Range Resources, offer 8-10% free cash flow yields and are buying back 10-15% of their equity with that cash. On valuation alone the risk-reward of owning them is better than the AI trade, even though prices can still fall.

  “Natural gas companies get eight, nine, 10% free cash flow yields. Look at Antero, Range Resources. The companies are buying back 10 to 15% of the equity underneath you with that free cash flow.”at 44:29

Range Resources

• Larry McDonald · The Bear Traps ReportBullish

  Range Resources is cheap: 8-10% free cash flow yield funds 10-15% buybacks, better than AI risk.

  Larry cites Range Resources alongside Antero as natural gas companies with 8-10% free cash flow yields that are buying back 10-15% of their equity. Given that cash generation and buybacks, he sees better risk-reward in these stocks than in the AI trade.

  “Natural gas companies get eight, nine, 10% free cash flow yields. Look at Antero, Range Resources. The companies are buying back 10 to 15% of the equity underneath you with that free cash flow.”at 44:29

Bitcoin

Across the shows: 11 speakers in other episodes, 8 bullish and 3 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportUncertain

  Bitcoin's quantum-computing risk is growing; Larry bought on lows, recently trimmed, stance uncertain.

  Larry's firm bought some Bitcoin on the lows this summer and recently lightened the position because of quantum computing risk. Two years ago the quantum threat was a joke at his dinners, but about 50% of institutional investors now see it as a threat within five to seven years. If quantum computing unlocked Bitcoin's underlying code, the impact on portfolios would be large.

  “Bitcoin, we've been buying. We bought some this summer on the lows... and we recently lightened it. I'm worried about quantum computing... now I would say 50% of institutional investors think it's a threat five to seven years from now.”at 46:08

Invesco S&P 500 Equal Weight ETF

Across the shows: 2 speakers in other episodes, 2 bullish and 0 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportBullish

  Advisers are buying equal-weight RSP to escape the cap-weighted S&P's concentration risk.

  Large financial advisers, about 10% of Larry's clients, are reconstructing the S&P 500 because they don't fully trust in-house research. They are buying the equal-weight S&P 500 (RSP) as another way to own the index, which puts more weight on companies that control hard assets.

  “Buy buy the RSP or the s and p 500 equal weight, which is... That's another way to own the S and P, or or have a financial adviser reconstruct the S and P for you that puts more weight on companies that control hard assets.”at 48:40

US stock market outlook

• Larry McDonald · The Bear Traps Report

  The S&P 500 drops 30% over the next year, then stays flat for about eight years, once the IPO supply is absorbed.

  The index is at all-time highs while about 60 well-known brands are down 35-80%, a split he calls the dark side of passive investing. Passive flows are concentrated in a handful of names: tech is about 50% of the S&P, and the top two stocks (Nvidia about 8%, Apple about 6%) make up roughly 13% of the index. He expects mega-cap AI IPOs (SpaceX, Anthropic, OpenAI) to be added to indexes and sold into retail demand, which precedes a 30% drop over the next year. He compares the setup to 2000-2010, when the S&P was flat for a decade, and says there are gems to pick within the market.

  “I think the... In the S and P, once we get through this this dumping of the IPOs, the S and P is gonna drop 30% over the next year. It's probably gonna be flat for eight years.”at 11:11

• Larry McDonald · The Bear Traps Report

  Capital will rotate from growth stocks into hard-asset companies, lifting their S&P weight from 12-14% to 20-30%.

  In the 1968-81 regime of high inflation and high rates, industrials, materials and energy made up about 50% of the S&P. He argues that a sustained inflation regime makes discounted cash flows from hard assets such as oil, gas, coal and metals worth more, and the value of intellectual property worth less. Trillions will move out of financial assets, so he expects the S&P weight of these groups to rise from 12-14% to 20-30% over five years.

  “trillions are gonna come out of financial assets... They're gonna go into companies that control hard assets... that's gonna go from, you know, 12 to 14% to 20 to 30%.”at 21:55

• Larry McDonald · The Bear Traps Report

  Beaten-down stocks sold for year-end tax-loss selling could rally 30-50% by June or July.

  Mutual funds and retirees sell losing stocks into year-end for tax-loss purposes, pushing down the losers, which then buy back after 31 days. This creates the January effect for losers. Larry expects the beaten-down basket, along with bonds, to offer 30-50% returns from now until June or July.

  “between now and June, July, these bonds and this kind of beaten down basket of stocks could offer 30, 40, 50% returns in some cases.”at 40:11

• Larry McDonald · The Bear Traps Report

  S&P 500 is dangerously concentrated, with half in one sector; passive flows make it dumber.

  About half the S&P 500 sits in one sector, so passive investing is buying the top six stocks regardless of valuation, which Larry calls dumb money that grows dumber as more money flows in. He sees this extreme concentration as the reason investors are rebuilding the index with equal-weight or adviser-customised exposure.

  “we're at a point where it's it's so extreme with the 50% of the of the S and P that's in one sector that people are starving... the indexes have to buy the top six stocks, and it just becomes dumber and dumber and dumber.”at 48:10

US Treasuries & yields

• Larry McDonald · The Bear Traps Report

  Global bond stress from French debt exposure will hit the S&P in coming months; long bonds then offer equity-like returns.

  He cites SocGen falling about 20% in a few weeks because of its exposure to French government paper, and says the global bond market is in a nasty position. He expects this to trigger a crisis in the S&P within a couple of months. He thinks yields may rise further in a blow-off before reversing, which would hurt banks through their bond holdings. Long-dated bonds bought at crashed prices now offer equity-like returns, so he says institutions are looking at long duration, e.g. a 2.55% Apple bond at 47 cents that could return about 18% a year if the 30-year yield falls back to 4%.

  “That's probably gonna trigger that kind of crisis in the index, the S and P, in the next couple of months. I think yields could go a little higher, but... That... If they do go higher, it'll be a blow off, nasty, and then a reversal.”at 12:22

• Larry McDonald · The Bear Traps Report

  Debt-ceiling cash management can lift bond prices over six to nine months, a rally inside a bear market.

  The debt ceiling will be hit in January with a split Congress, so Treasury would draw down its TGA cash account (about $1 trillion) plus roughly $300 billion of extraordinary measures, possibly leaving no net Treasury issuance from about March to July. Larry says Treasury has many tricks to push bond prices up over the next six to nine months, but he frames it as a bear market rally: bonds are in a vicious bear market.

  “We hit the debt ceiling. Next thing you know, treasury has a trillion dollars in the TGA. ... So we might not have any treasury issuance between, like, March, April, May, June, July next year. ... There's a lot of things that they can do to really get bond prices up over the next six to nine months.”at 38:12

US deficit & government debt

• Larry McDonald · The Bear Traps Report

  The $40T debt can only be escaped by default or inflation, so financial repression is coming.

  He says the US has a $40T debt load, with deficits running around 6% of GDP, and that the policy response since COVID and the 2023 regional bank crisis has been about $17T, against $4T after Lehman. With foreign buyers such as China and Japan reducing holdings, he thinks the Fed and Treasury will work together on financial repression, which pushes money out of financial assets and into hard assets. He sees only two exits, default or inflating the debt away.

  “The only way out, Maggie, of a $40,000,000,000,000 debt hole, there's two ways. Default or inflate your way out.”at 29:27

• Larry McDonald · The Bear Traps Report

  US debt far exceeds government assets, so Washington may reprice gold or use it as collateral.

  Larry compares the US to the UK 80 years ago, an empire in decline that moved out of Hong Kong and monetized assets. The US has assets like the Tennessee Valley Authority and parts of Yellowstone, but its debt is far larger, and government assets are small relative to the debt. He expects tricks such as repricing gold or posting it as collateral to support the Treasury market.

  “But we have a lot more debt than our government assets... the government assets relative to the debt is actually pretty crazy small... They wouldn't reprice the gold, maybe put it up as collateral.”at 37:17

IPOs, M&A & deal activity

• Larry McDonald · The Bear Traps Report

  Billionaires are dumping mega AI IPO shares, SpaceX, Anthropic and OpenAI, on retail via index inclusion.

  He says SpaceX, Anthropic and OpenAI were worth about $360B three years ago and are now worth around $5.1T, and that they will be placed into the Nasdaq 100 and eventually the S&P 500. He argues that insiders are cashing out into retail and 401(k) investors, who become the exit liquidity for private money. He compares Anthropic's expected IPO valuation of about $2T with Google's IPO and calls it a sign of excess.

  “This is the greatest cash out from billionaires in Silicon Valley we've ever seen, and they're dumping the shares into the laps of mister and missus Joe [Lunchpail], average investor...”at 4:10

US consumer

• Larry McDonald · The Bear Traps Report

  Rising oil, fuel and Treasury yields have already dealt the US consumer a roughly $300B blow.

  The 12-month Treasury yield is up about 100 basis points over six months, and oil, gasoline and diesel are up 60-120%. He says that combined shock has already taken about $300B out of consumer spending power, and that this is why restaurant and home-improvement names are down 30-35%.

  “we've already had a $300,000,000,000 punch to the face of The US consumer.”at 6:20

Consumer AI products

• Larry McDonald · The Bear Traps Report

  Consumer AI assistants are becoming free and commoditized, with about 40 rivals and no barriers to entry.

  Google announced an AI assistant the same day and Apple is expected to have one. He expects about 40 of these products, all free, which means no company can charge for consumer AI on its own. He argues this is why companies spending heavily on consumer AI, such as Meta, are not the beneficiaries of AI-led search and assistants.

  “Google announced one today. Apple's gonna have one. There's gonna be 40 of these things, and it's a free product, Maggie.”at 14:54

AI infrastructure & data centers

• Larry McDonald · The Bear Traps Report

  Hyperscaler AI capex has no clear payoff; when it slows in two to three months, the Mag Seven will reset.

  He calls the AI capex race a testosterone contest in which Silicon Valley does not know when it will pay off, and says the near-term disruption comes before any return. He expects capex growth to slow within about two to three months, which would trigger a reset in the Mag Seven and in the indexes that hold them. He says investors should not touch those names, and points to European and US regulators pushing to slow AI.

  “once these guys start to slow down the CapEx, which probably happens in the next two to three months, then you can have a big reset in the mag seven.”at 17:34

Gold & precious metals

• Larry McDonald · The Bear Traps Report

  Washington's sanctions give central banks a strong reason to shift reserves from Treasuries into gold.

  He points to Western sanctions on emerging markets and the confiscation of Russian assets. He argues that other countries now see the risk of holding Treasuries, and cites China's Treasury holdings falling by about $600-700B in recent years as they buy gold. He calls this a structural incentive for central banks to move reserves out of Treasuries and into gold.

  “Washington basically triggered this massive incentive for all kinds of central banks to take money out of treasuries and put it into gold.”at 25:59

Stablecoins & crypto policy

• Larry McDonald · The Bear Traps Report

  Stablecoins grew from $100B to about $300-350B, and could reach $1-1.5T in five years.

  He says the stablecoin market has moved from about $100B to roughly $300-350B and is mostly backed by Treasury bills. He expects it to reach $1-1.5 trillion within five years. He argues that policy will push international investors into dollar stablecoins, which creates a channel for Treasury demand and a challenge to the Eurodollar banking system.

  “I think stablecoins probably go in the next five years to a trillion, trillion and 0.5.”at 27:44

US dollar

• Larry McDonald · The Bear Traps Report

  The dollar is much lower and bearish, but the US will not lose reserve status in his lifetime.

  His firm's book had a bearish dollar chapter written in 2022-23, and the dollar has since fallen a lot. He still expects the US to keep its reserve currency status, citing speed bumps such as stablecoin policy rather than a loss of status. The stablecoin channel is one of those speed bumps.

  “We have a bearish dollar chapter... Dollar is much lower now. But in my lifetime... we're probably not gonna lose our reserve currency status.”at 33:43

Commodities (broad)

• Larry McDonald · The Bear Traps Report

  Hard assets are the place to be; AI buildout is inflationary and global wealth is rebalancing toward commodities.

  Larry says the first stage of AI is inflationary: Caterpillar stock is up about 300% in roughly a year and a half because data centers need construction equipment, copper and grid rebuilds. Even if the AI buildout slows, global wealth rebalancing should support hard assets: the Nasdaq 100 holds about $43 trillion of wealth versus under $1 trillion in the XME metals ETF, and US household commodity exposure fell from about 4% in 1981 to about 1%.

  “So the first stage of AI is very inflationary because... stock is up 300% in, like, a year and a half. ... And so hard assets are the place to be. ... even if there's an AI slowdown, it's that rebalancing of the wealth globally that will support these stocks.”at 42:56

Copper & industrial metals

• Larry McDonald · The Bear Traps Report

  Data centers and grid rebuilds will need hundreds of thousands of tons of copper, supporting demand.

  Larry argues that hundreds of thousands of tons of copper will be needed for data centers and for rebuilding the power grid. He adds that India, with about a billion people without air conditioning, must build energy infrastructure, which also supports hard-asset demand.

  “Think of all the copper. ... hundreds of thousands of tons of copper are gonna need... Be needed for the data centers to rebuild the power grid.”at 43:08

AI bubble & tech valuations

• Larry McDonald · The Bear Traps Report

  The AI trade looks like insanity; Nasdaq concentration makes hard assets a better risk-reward.

  Larry says owning cash-generating companies that buy back stock beats the AI trade on risk-reward. About $43 trillion of wealth sits in the Nasdaq 100 versus under $1 trillion in the metals ETF XME, and if the planned data center buildout fell sharply, the wealth rotation toward hard assets would still support those stocks.

  “your risk reward to be long, something that is producing free cash with the company buying back stock underneath you, that risk reward is a lot better than than the AI AI, you know, insanity.”at 44:46

Cybersecurity

• Larry McDonald · The Bear Traps Report

  Cybersecurity stocks are running hot but Larry plans to build a basket and buy on dips.

  If quantum computing threatens Bitcoin's cryptography, companies solving that problem become the area to play. Cybersecurity stocks are currently crazy high, but Larry plans to build a basket of them and buy on dips.

  “Are you looking at anybody who's solving... That's an area. And now the cybersecurity stocks are all, you know, crazy right now. But, yeah, on the dips, absolutely. We gotta create a basket of those.”at 46:50