Bill Gross, the former chief investment officer and co-founder of Pimco said in an article released Wednesday that stocks are "clearly overvalued."
Gross, once known as the bond king, explained that EPS levels and forward assumptions are "only part of the story" and now have a "less significant influence on stock prices than the change in interest rates, which tend to dominate longer-term values."
The surge in bond yields over the last two years might even cause equity analysts to wonder why stocks aren't in a bear market, Gross stated.
He is also suspicious of a new bull market occurring, stating that unless the Federal Reserve can significantly lower real 10-year Treasury rates from 2.25%, "investors may eventually realize that bonds are a better deal than clearly overvalued stocks headed into an economic slowdown/recession."
However, Gross doesn't believe Powell will be willing or able to lower short rates significantly amid a 3% inflation future.
As a result, he said he would "pass on stocks and bonds in terms of future total returns" and seed the best bets as arbitrage situations that yield annualized returns of 10-20%.
Gross advised investors to keep an eye on real and nominal 10-year Treasury rates, as he believes they need to decline significantly to validate existing forward P/E ratios.