Jeremy Grantham's right-hand man says the S&P 500 is still 30-40% overvalued — and tariffs just sank its best bull case

• Trump's tariffs threaten the US stock market's appeal, says Ben Inker of GMO.
• Tariffs could hurt large-cap growth firms' profit margins, impacting market performance.
• Inker advises investing in non-US stocks due to valuation discounts and economic risks in the US.

President Trump's tariff rollout this week sank the one justification investors had for buying into an already expensive US stock market, according to Jeremy Grantham's right-hand man, Ben Inker.

"The best bull case one could have had for it was if you look at the S&P 500 relative to other stock indices around the world, yes it's a lot more expensive, but US companies are the envy of the world and they make a lot more money," the co-head of asset allocation and portfolio manager at GMO told BI on Friday.

"The problem with what just happened is I think this kind of blows a whole in that 'yes, but,'" he added.

Specifically, tariffs will hurt the ability of large-cap growth firms — which have driven much of the market's performance over the last few years — to keep their profit margins high, Inker said. He cited Apple as an example. The company's share price has fallen almost 16% since Wednesday.

"The reason Apple's stock went down as much as it did was because tariffs are going to really raise the price of production," he said. "Apple has wonderful margins, but that means when the cost of production goes up, some of that eats into their margin, so they get lower sales and lower margins."

Even with this week's sizable market rout, Inker said the S&P 500 remains overvalued by 30% to 40%. Since early 2022, GMO's cofounder Jeremy Grantham has regularly warned that stocks are in a bubble.

Asked whether the sell-off would continue, Inker said it's possible given the current valuation premium and protectionist policy coming out of the White House.

"If it wants to fall to fair value, it's got plenty of room," Inker said of the S&P 500. "This is not what I would have recommended the government do if it wanted to keep the stock market up. The best way to keep an expensive stock market up is to help companies continue to look exceptional, and this ain't the way to do it."

Inker said his positioning hasn't changed much in recent days, and that he still has a "strong preference" for non-US stocks compared to US stocks because of the valuation discount that exists in the rest of the world.

Plus, tariffs don't bode well for the US economy, he said. Wall Street agrees: JPMorgan now says there's a 60% chance of a recession in 2025, Goldman Sachs places those odds at 35%, and UBS said on Friday that a downturn is likely if tariffs are not reduced in the months ahead.

"If this sticks around, this will be sort of a disaster for aggregate productivity and GDP in the US," Inker said.

One way to gain exposure to non-US stocks is through funds like the Vanguard FTSE All World ex US ETF (VEU) and the iShares MSCI ACWI ex US ETF (ACWX).

In a quarterly letter on Tuesday, Inker also urged investors to stay away from US high-yield credit given the economic uncertainty. The assets are considered higher-risk because the companies issuing the bonds have less solid fundamentals and therefore an increased likelihood of going under and defaulting.