Jeremy Grantham warns US stock market is most expensive in history

Veteran investor Jeremy Grantham has warned that the U.S. stock market is the most expensive in American history relative to GDP, citing the artificial intelligence boom as a key driver.

Grantham, co-founder of GMO, told CNBC's Squawk Box that based on the value of the stock market compared to GDP, with modifications, this is the most expensive market in American history. He noted that while he wasn't sure there was a comparable period, the tech bubble of 2000 is the closest analogy. Grantham also highlighted the so-called Buffett indicator, which compares the total value of the U.S. stock market with the size of the economy in terms of GDP.

For stock market traders, such extreme valuations often signal elevated risk of a correction. Historically, when the Buffett indicator reaches levels far above historical averages, subsequent returns over the next decade tend to be lower. Traders can monitor real-time valuations and market moves on NowPrice's live stocks dashboard to stay informed. The current environment suggests that investors should be cautious about chasing momentum, especially in AI-related names that have driven much of the recent rally.

Looking ahead, Grantham's warning adds to a growing chorus of voices calling for caution. Key data to watch include upcoming earnings reports from major tech companies, which will test whether high valuations are justified. Additionally, any shift in Federal Reserve policy or economic data that weakens the growth narrative could trigger a revaluation. Investors should also keep an eye on the Buffett indicator and other valuation metrics for signs of mean reversion.