"Old Bond King" Gross: US stocks appear to be overinflated, and the US economy is facing a severe recession.

Zhitong App has learned that Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Company (PIMCO) and known as the "Bond King," has warned that stock valuations are too high and a severe recession is a real threat, with the United States caught in a debt spiral.

Gross stated that the record high of the S&P 500 index means nothing to him. He said that with the current real interest rate or inflation-adjusted rate limited to 1.8%, the benchmark stock index's price-to-earnings ratio of about 19 times is "too high."

Since the beginning of 2022, the Federal Reserve has raised interest rates from near-zero levels to over 5% to combat historic inflation. In December of last year, the U.S. inflation rate remained as high as 3.4%. Gross pointed out that although rate hikes typically curb spending and borrowing, erode corporate profits, and redirect investor demand from stocks to safer assets such as bonds and savings accounts by raising yields, stock market valuations have not declined significantly.

Gross stated, "Ultimately, the price-to-earnings ratio must be more balanced with relatively higher real interest rates."

The investor known as the "Bond King" warned against putting more money into the so-called "Big Seven" tech stocks that led the market higher last year.

When talking about tech stocks including Tesla (TSLA.US) and Nvidia (NVDA.US), he said, "It may be time to cool off a bit and put money elsewhere." Gross praised stocks in industries such as energy, tobacco, and telecommunications, which are cheaper and lower risk, with dividend yields ranging from 5% to 10%, making them attractive.

The seasoned market participant called on the Federal Reserve to relax control over the economy as soon as possible to avoid stifling economic growth and triggering a recession.

"The Fed should lower interest rates in the next 6 to 12 months," he said, explaining that this would "essentially balance real interest rates and lower rates so that the economy does not fall into a severe recession."

Gross urged investors to remain cautious in the face of various threats at home and abroad. From the political tensions leading up to the U.S. presidential election this winter, to conflicts between Russia and Ukraine, Israel and Gaza, and attacks by Houthi militants on ships in the Red Sea, disrupting the global supply chain.

He also expressed helplessness regarding the mounting debt burdens in the United States and many other countries.

Gross said, "The situation now is that there is too much debt, and in order to maintain the rolling of debt and the nominal rolling of the economy, it is necessary for the Federal Reserve to maintain a relatively loose monetary policy, as is fiscal policy." "I believe the $1.5 trillion deficit will continue."

Gross's comments echo his latest investment outlook, where he advises investors to stay in the market to avoid missing out on returns while also being cautious and avoiding the riskiest assets.