Meb Faber Says He's an Optimist—but He Thinks a Big Drop in Stocks Would Be ‘Totally Normal'

Cambria’s Meb Faber argues U.S. stocks look expensive, citing a CAPE in the low 40s (vs. a historical ~18), which he says has historically produced muted future returns. He suggests investors consider non-U.S./emerging markets where valuation is described as in the low 20s to high teens, noting foreign equity performance has lagged but valuations are more reasonable. He warns a 50% drawdown in the U.S. stock market between now and 2030 would be “totally normal,” implying near-term risk is elevated for holders concentrated in U.S. equities.

Analysis

The actionable signal here is not “buy foreign stocks” so much as “stop assuming U.S. index-level compounding is the base case.” When one market becomes the global safe default and a handful of mega-caps dominate index returns, the next regime shift usually comes from multiple compression, not an earnings collapse. That makes the best expression a relative-value one: own cheaper, less-owned, less-concentrated exposures where even modest earnings revisions can matter more than sentiment.

Near term, this is mostly a positioning and flow story, not a catalyst story. In the next 1-3 months, any pause in U.S. earnings upgrades, a stable-to-lower dollar, or softer inflation/rates data can trigger incremental reallocations into EFA/VWO and RSP as allocators look for breadth after years of index concentration. Over 6-18 months, the real risk to U.S. large-cap leadership is that rich valuation plus crowding leaves it vulnerable to a benign macro surprise that simply fails to justify the premium.

The contrarian miss is that cheap markets stay cheap without a catalyst: ex-U.S. equities still need either a weaker USD, better PMIs, or a turn in local earnings revisions. So the right stance is selective, not wholesale anti-U.S. The headline risk of a 30%-50% drawdown should be treated as a portfolio-construction warning, not a timing tool; what matters for us is whether the next leg is broadening under the surface before it shows up in index performance.

Key Decisions for Investors

• Rotate 5-10% of U.S. mega-cap exposure into EFA/VXUS and VWO over the next 2-4 weeks; the payoff is mean reversion in valuation and ownership, with the main risk being a renewed U.S. earnings-led melt-up.
• Pair trade: long RSP / short QQQ for a 3-6 month horizon. This expresses breadth outperformance if leadership narrows or valuation de-rates; stop if QQQ keeps outperforming on accelerating EPS revisions and falling real rates.
• Add a small hedge via QQQ 6-12 month puts or put spreads financed against existing U.S. growth exposure. This is less about predicting a crash than owning convexity against a 20%-plus drawdown that is plausible in an expensive market.
• Monitor DXY and U.S. 10-year real yields as the key falsifiers for the foreign-equity rotation. If the dollar re-accelerates and real yields rise, ex-U.S. relative strength should be faded.
• Prefer selective EM/value baskets over broad developed-market beta if you want the highest asymmetry; the trade works best if local monetary easing and dollar softness coincide, but it should be sized modestly because the catalyst path is uneven.