S&P500 could fall by 48 percent says strategist

The S&P500 could fall 48 percent when the stock market bubble bursts and a recession hits, said strategist Paul Dietrich. The elite strategist pointed to a massively overvalued market and cracks in the economy. Dietrich predicted that inflation and interest rates would remain high and taxes would rise.

“I believe the coming recession will result in a deeper stock market decline than we experienced in 2000 and 2008” said B. Riley Wealth Management’s chief investment strategist in his latest monthly commentary.

Dietrich detailed warning signs indicating that stocks are hugely overvalued and close to suffering a correction. For example, he pointed to the S&P 500‘s price-to-earnings ratio and inflation-adjusted Shiller PE ratio, which, excluding past recessions, are both at multi-decade highs, and the benchmark’s historically low dividend yield of 1.35%.

He also noted that the market’s recent gains have been driven by investors’ enthusiasm over a handful of stocks like Microsoft and Nvidia, and their hopes that the Federal Reserve will cut interest rates later this year – not fundamentals like rising corporate profits.

In fact, Dietrich compared the huge hype around AI to the internet mania during the dot-com bubble. He also flagged the Buffett Indicator, which has risen to 188% this year – close to the 200% mark where buying stocks would be “playing with fire” in Warren Buffett’s view.

In addition, the strategist noted that the price of gold has jumped by around 20% to record highs over the past year. He attributed this to institutional investors buying the asset of sanctuary because they expect a “major correction or stock market crash due to our wildly overvalued stock market and a slowing underlying economy.”

On the economic front, Dietrich argued that decades of excessive fiscal spending and artificially low interest rates have staved off a downturn.

He predicted that interest rates would remain high for years to combat stubborn inflation, and that the government would be forced to raise taxes to deal with its huge budget deficit, dragging down the prices of assets such as shares and houses and causing an economic downturn.

“Nobody seems to notice that the economy is cooling down and there are risks to the economy everywhere,” he said. “I still think there is a strong possibility that the economy will go into a mild recession this year.”

Dietrich noted that the S&P 500 typically falls by about 36% during a recession, and the index would need to drop 12% from its current level of about 5,450 points to return to its 200-day moving average. Therefore, he warned that the index could fall by up to 48% to around 2,800 points – the lowest level since the Covid crash in spring 2020.

The Wall Street veteran is one of several top forecasters predicting pain for stocks and a recession ahead. But it’s worth noting that Dietrich has been sounding the alarm for months, and neither the market nor the economy has gotten into serious trouble.

Source: Vikingen.se

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