Michael Burry's Predictions: Why Stocks May Continue to Fall

As the stock market tries to navigate unpredictable waters, predictions swirl around like autumn leaves caught in the wind. Michael Burry’s recent statements suggest we might see another dramatic plunge—could your portfolio be at risk?

The Predictions of Michael Burry

"Adjusted for inflation, 2022 first half S&P 500 is down 25 to 26 and the Nasdaq is down 34 to 35. Bitcoin is down 64 to 65. That was multiple compression. Next up earnings compression, so maybe halfway there." — Michael Burry

Michael Burry is the name on everyone's lips in the financial world, especially after his recent Twitter musings predicting a potential further decline in the stock market. According to Burry, we might see a drop of up to 50% from current levels. He points out that after adjusting for inflation, the S&P 500 has already fallen roughly 25% to 26%, while the tech-heavy Nasdaq is down about 34% to 35%. Bitcoin—a notoriously volatile asset—has plummeted a staggering 64% to 65% [verify].

Burry’s core argument centers on two drivers of stock prices: multiple compression and earnings compression. Simply put, a stock’s price equals its earnings figure multiplied by the earnings multiple investors are willing to pay. If either factor weakens—due to rising interest rates, slowing growth forecasts, or squeezed profit margins—values can cascade lower.

Understanding the Market Dynamics

In the world of stocks, price adjustments are driven by both earnings and the multiples investors assign. Consider a hypothetical company with earnings per share (EPS) of $10 and a price-to-earnings (P/E) ratio of 25. That stock trades at $250. But when inflation pushes up input costs and the Federal Reserve hikes rates, investors demand higher yields elsewhere (like bonds), so they pay a smaller multiple on earnings. If the P/E compresses from 25 to 15 while EPS remains constant, the price falls to $150—a 40% drop.

What’s particularly notable is that interest rates have been on a decades-long descent, fueling P/E ratios ever higher. Since the 1980s, investors have grown accustomed to low rates, bidding up multiples for perceived growth. Now, with the federal funds rate rising, bond yields climb too, competing directly with dividend and equity returns. In response, the S&P 500’s P/E ratio has shrunk from 37 to 19—a halving of the multiple that, if not offset by rising earnings, translates into a 50% market decline.

The Role of Economic Conditions

Michael Burry argues that we’re only halfway through this cycle, with earnings compression yet to fully bite. Current economic headwinds—rampant inflation, supply-chain snarls, a tight labor market, and rising borrowing costs—are squeezing corporate margins. Businesses can pass only a portion of higher expenses to consumers before facing lost market share or deflationary competition.

For example, manufacturers facing steel and freight surcharges may struggle to maintain profit growth. Meanwhile, service firms hit by soaring wages cannot always hike prices without driving customers elsewhere. If overall S&P 500 earnings reverse their recent gains and move lower, even a stable P/E of 19 would push stocks further down. A slide back toward historical average multiples (around 14 or 15) could intensify declines.

Handling Predictions: The Investment Philosophy

So, should you raise cash and wait for the next big drop? Many seasoned investors say no. Attempting to time macro shifts—GDP figures, Fed moves, or spikes in CPI—often proves futile. Instead, they emphasize rigorous company analysis, focusing on business models, competitive moats, balance-sheet strength, and free cash flow generation.

Predictive market calls may highlight risk, but they shouldn’t become the centerpiece of your strategy. Rather than chasing headlines or trading around short-term volatility, the goal is to own well-run businesses at fair prices and hold for the long haul. That approach sidesteps emotional reactions and shifts attention to what you can control: the quality and valuation of your investments.

Long-Term Perspective

Short-term macro fluctuations impact businesses unevenly. Highly leveraged firms or unprofitable startups dependent on external funding are most vulnerable if capital dries up. In contrast, established companies with strong cash flows and low debt can weather multi-year downturns. Over time, temporary revenue dips or cost spikes have minimal bearing on durable fundamentals.

When great companies trade below intrinsic value due to market fear, patient investors find opportunity. A disciplined focus on free cash flow yields, conservative payout ratios, and management track records helps pinpoint these moments. Rather than fearing market noise, long-term investors use volatility to build positions in businesses they understand and believe will compound value over years.

Conclusion

Michael Burry’s market predictions underscore genuine risks—multiple contraction and potential earnings declines—but successful investing demands more than following alarmist forecasts. By grounding decisions in business quality, balance-sheet health, and reasonable valuations, you stay focused on fundamentals, not price swings. When the market’s short-term outlook grows bleak, well-prepared portfolios can take advantage of undervaluation and compound returns over time.

• Focus on durable cash flow businesses and hold through volatility.