'Bond King' Bill Gross warns of AI-driven 'excessive exuberance' in stocks, and says he's not buying bonds either

• The ongoing AI frenzy and high federal spending are the main factors driving market records, Bill Gross wrote.
• Investors can expect "excessive exuberance" down the road.
• While Treasury yields have climbed in past years, Gross is shorting 5- and 10-year notes.

Stock have notched a string of record highs this year, driven by a tech frenzy and high federal spending that have blotted out all else, Bill Gross wrote in his latest investment outlook.

It's these factors that have spurred the S&P 500 up over 20% since mid-2022, even as interest rates tightened aggressively in the same timeframe, sending Treasury yields higher. 

"The fact that the stock market has been unaffected by the 300-basis point rise in 10-year [inflation-adjusted yield] over the past 2 years tells an observer something," the PIMCO co-founder said. "It tells me that fiscal deficit spending and Al enthusiasm have been overriding factors."

And the trend isn't going away anytime soon, he asserted: "Buckle up for excessive exuberance."

Typically, bond yields will decline ahead of stock euphoria. For instance, the Nasdaq 100 increased twelvefold after the 10-year real rate fell from 2% to negative 1% between 2004 and 2022, he noted — though other factors also drove the gains.

But while Treasury rates have re-surged, Gross isn't eyeing a jump back in.

Known to Wall Street as the "bond king," he warned that there's too much supply of 10-year notes to make them a good investment: "I don't understand any of the new bond gurus on CNBC when they tout bonds over the last 12 months."

If the economy is to avoid a recession — as many now agree it will — then the yield curve will flatten, Gross forecasts. That means that 10-year rates will rise to match short-dated ones, which have sat higher on bets of a slowdown.

His strategy is to go long on two-year notes, while shorting 5- and 10-year Treasurys.

While Gross acknowledged that he's tried trading off the AI frenzy by buying into Broadcom, his focus over the past 12 months has centered on pipeline master limited partnerships and regional banks.

MLPs have benefited from higher oil prices, and have gained 28% average increase since 2023, alongside 9%-10% tax deferred yields, he said. Though he warned investors to be cautious about joining the sector now, he touted Western Midstream Partners.