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In the long run, we live in a growing economy , but half the time you wait to get back to the old high. People don't realize this because we've just spent the last, if anything, 16 years growing. But in the long run, it's half the time. After 1929, you have to wait until 1954. Uh, this is, uh, the most expensive market in American history.
I think somewhere between two weeks ago, two weeks from now, two months, two quarters, and maybe two years. Time is always very uncertain. The market will peak and return to the trend. And the return to trend from here is, uh, closer to a 70% drop than a 50%. Do you think 70% drop is correct? Yes, I think so.
And keep in mind that in our quarterly letters we talked about the NASDAQ falling 70-75% in 2000, and it fell 82. When a legendary investor who accurately predicted the 1989 Japanese asset bubble , the 2000.com crash, and the 2008 housing crisis issues a warning, the smart money listens. Jeremy Grantham, co-founder of GMO, a powerful firm managing $85 billion , has just made a statistical splash .
The current stock market is the most expensive in American history, trading at a price- to-earnings ratio 60% higher than its 100-year average. Grantham's core investment philosophy revolves around reversion to the mean, the unwavering statistical law that extreme market expansions must eventually return to reality.
Driven by historical uncontrolled overinvestment in artificial intelligence, he warns that a standard correction will not solve the problem this time. A return to the long-term trendline requires a staggering 70% market collapse. This isn't just wishful thinking, Grantham points to 2000, when his team predicted a massive NASDAQ crash and watched it fall 82%.
He argues that while AI will inevitably change civilization, the current hype cycle completely mirrors the railroad and bunker manias, where overly enthusiastic investors ultimately lost all their money. However, Grantham is not just sitting on money. His doctrine dictates the use of capitalization on a deeply misjudged defense.
Today we unlock three safe harbor actions that fit perfectly into Grantham's defensive scheme. These powerful companies are currently suffering from recent market volatility, which means their decline is already heavily priced into their prices. When the inevitable panic sets in and the broader bubble bursts, Defensive Capital will aggressively dive into these very price anchors.
Let's look at the data. First on the list is Microsoft, trading under the ticker MSFT, a tech titan that might shock you given Grantham's cautious stance on AI over investing. But the raw data shows exactly why his asset management firm GMO aggressively increased its stake by more than 17%, reaching a total of 6.2 million shares, creating a massive position worth $2.3 billion .
This tech giant has endured a brutal 19% decline since the start of the year, falling well below $400 per share, hitting its 52- week low. However, this short-term volatility has created a historic discount for active investors seeking structural safety. Microsoft shares are currently trading at an extremely low 23-24 times forward non- GAAP earnings, a huge drop from its 10- year average of over 31, and structurally cheaper than Alphabet at 27.7 and Amazon at 29.4.
The broader market is actively punishing the company for its massive capital expenditure cycle. But a deep dive into the business model reveals impeccable operational health. Look at the exact numbers. Demand from businesses remains robust, supported by commercial fulfillment commitments that have nearly doubled to an impressive $627 billion.
Meanwhile, its flagship cloud platform Azure continues to show explosive growth, forecasting a 39% increase next quarter, while the official AI usage rate has increased by 123% to reach $37 billion. Rather than succumb to margin compression, Microsoft is implementing an ingenious cost insourcing strategy, replacing external models with its own family of MAIs in core software products like Excel and Outlook to directly reduce inference costs and protect profitability.
Additionally, management is aggressively tightening its cost architecture, cutting 4,800 jobs while defunding low-yielding gaming segments to redirect capital directly into its high-yielding cloud business. A smooth transition from enterprise software to the undisputed king of social media. The second stock on our list , another mega-cap tech giant that Jeremy Grantham's firm has quietly amassed.
GMO recently increased its stake by over 5.6%, creating a huge position of 3.1 million shares worth an impressive 1.8 billion. Despite falling nearly 12% year-to-date to around $600, Meta shares exhibit a historical valuation anomaly, trading at a compressed multiple of 17-19 times forward earnings, 19% below the 5-year historical average.
The broad market swings are entirely driven by strong concerns about capital spending, as investors watched Meta's infrastructure investment skyrocket to a targeted peak of $ 125-145 billion this year. Critics argued that this aggressive spending would permanently destroy short-term profitability, but the underlying data reveals a very different story of unparalleled financial health.
Meta's core advertising ecosystem remains fully resilient, as global ad impressions grew 19% year-over-year, while the average revenue generated per daily active person grew an incredible 27% to $15.66. This volume expansion delivered an exceptionally high operating margin of 41%, allowing the tech giant to generate $32.2 billion in operating cash flow and $12.44 billion in net free cash flow in a single quarter, easily supporting its phase of significant investment.
But the main catalyst for active investors was the emergence of Meta Compute. Rather than leave its equipment idle, Meta is turning its 1 gigawatt data center, equivalent to about 700,000 premium processors, into a profitable computer rental business . With global chip rental rates rising to $2.82 82 cents per hour, Meta can instantly monetize its excess capacity, paving the way for normalizing capital expenditures by fiscal year 2027.
As we shift our focus from social media to the absolute giant of global logistics and cloud infrastructure, the third stock on our list is Amazon, trading under the ticker AMZN, the newly crowned king of commerce, which Jeremy Grantham's firm secured in a whopping $1.3 billion acquisition, owning 6.2 million shares.
Despite a recent 11% correction from its 52-week high to $243, Amazon has reached a historic milestone, officially overtaking Walmart as America's largest retailer. While Wall Street is focused on the massive capital spending on infrastructure, short-sighted analysts are overlooking the broader operational masterpiece .
Amazon systematically integrates its ecosystem to monetize every hour of a consumer's day. Since its launch, the new Alexa Plus AI assistant, built using advanced big language models on Amazon Bedrock, has been driving incredible consumer engagement, demonstrating a three-fold increase in purchases made through the device in international markets.
During business hours, Amazon Web Services completely dominates the enterprise market , delivering an impressive 28% annual revenue growth to $37.6 billion, the fastest growth rate in 15 quarters. During the first 3 years of this generative wave, AWS’s dedicated AI revenue growth rate exceeded $15 billion.
But the main catalyst is Amazon's own booming silicon business. Its specialized Tranium 2 accelerator chips offer 30% better price- performance than standard GPUs on the market and are fully sold out, securing an impressive $225 billion in long-term revenue commitments from the world's leading AI labs such as OpenAI and Anthropic.
With annual chip sales already exceeding $20 billion and the highest EBIT growth rate among its peers, Amazon is a diversified cash-generating monster that defensive capital will aggressively target. These three institutional-level value benchmarks prove that even in a historic 70% market crash, Smart Capital always finds a way to win.
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