GMO, the Boston-based investment firm co-founded by Jeremy Grantham, released its latest quarterly note to clients on Sept. 24 with a message many investors will not want to hear.
The firm thinks a slow-building problem could soon reduce how much money people make from holding a broad U.S. index fund.
Grantham himself has already told CNBC this is “the most expensive market in American history.” The firm’s newest letter says supply and demand will drive the next 18 months of market changes more than high prices will.
GMO’s warning to U.S. stock investors
GMO Head of Asset Allocation Research John Pease and Co-Head Ben Inker laid out the case in the firm’s latest investor letter. GMO manages about $85 billion and has a long history of spotting market changes that Wall Street strategists miss.
Their point is that the number of shares in U.S. stocks is growing faster than the market can handle. In previous years, share supply reduced by about 1% a year because companies bought back their own stock.
That trend has changed. GMO says supply is now on track to grow about 5% a year, a jump of six points from the long-term average.
“We believe the equity supply already coming to market is large enough to have a meaningful dampening effect on likely returns, perhaps a 20% hit relative to normal over the next year and a half, if history is a decent guide,” Inker and Pease wrote in the note, according to AOL.
That figure describes a slow drop in returns for anyone holding the S&P 500 through this cycle. It follows a warning Grantham gave earlier this year that U.S. valuations are near their worst in modern history.
What’s driving the flood: SpaceX, OpenAI, and Anthropic
Three private giants are the main reason behind the new supply picture. SpaceX went public in June at close to a $2 trillion valuation, and share sales by SpaceX insiders (outside of CEO Elon Musk’s personal holdings) already make up about 1% of the whole U.S. stock market, GMO estimates.
OpenAI and Anthropic, both preparing their own market debuts, could potentially add another 5% of the total U.S. stock market once they list, according to GMO‘s letter.
New IPO activity has been going at a pace that has not been seen in years. New public companies raised more than $137 billion in the first half of 2026, a nearly 400% increase from a year earlier, according to SEC data.
Why passive investors are especially exposed
Inker and Pease argue that today’s market makes this supply wave harder to absorb than in past cycles. A large share of U.S. trading now runs through automated index funds that simply follow a benchmark’s rules, rather than picking stocks based on the company’s strength.
“Today’s passive, benchmark-aware, and constrained markets leave fewer buyers willing to absorb new equity supply,” the pair wrote. Fewer active buyers means less protection when a new round of shares hits the market.
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Global stock ownership is also running near a five-year high, according to Bank of America’s latest fund manager survey. Investors do not have much cash on the side, so buying into the next big IPO likely means selling something else in their holdings.
That problem, known as the “forced seller” issue, is what GMO thinks will pull down big S&P 500 names as money gets moved into new listings.
What it could mean for AI stocks and the next 18 months
GMO believes this wave of new stock could be the trigger that eventually pops the AI bubble. “In a market as sensitive to equity supply as this one seems to be, prices are likely to turn before the market truly knows that has happened,” Inker and Pease wrote.
Other market watchers share the same concern. Billionaire Stanley Druckenmiller, a hedge-fund veteran with a decades-long record of calling market turns, recently warned about a possible profits bubble around AI infrastructure spending, and JPMorgan’s Jason Hunter has pointed to similarities with the months before the 2000 dot-com crash.
GMO’s advice for investors is to spread money across different investments. The firm’s 7-year forecast favors international and emerging-market value stocks, which it expects to deliver better returns after inflation in the coming years, compared to large U.S. companies.
GMO admits it can be hard to time this kind of slowdown, but the firm wants clients to know the next 18 months could carry a risk most market models miss.
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