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The S&P 500 could crash 48% if the stock bubble bursts and a recession hits, Paul Dietrich said.
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The elite strategist pointed to a vastly overvalued market and cracks in the economy.
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Dietrich predicted that inflation and interest rates would remain high, and taxes would rise.
The S&P 500 could be halved if the stock market bubble bursts and the US economy enters a recession, says Paul Dietrich.
“I believe the coming recession will result in a deeper stock market decline than we experienced in 2000 and 2008,” B. Riley Wealth Management’s chief investment strategist said in his latest monthly commentary.
Dietrich detailed warning signs that stocks are vastly overvalued and about to undergo a correction. For example, he pointed to the S&P 500’s price-to-earnings ratio and the inflation-adjusted Shiller PE ratio, which, barring past recessions, are both at their highest levels in decades, and the benchmark’s historically low dividend yield index of 1.35%.
He also noted that the market’s recent gains have been driven by investors’ excitement about a handful of stocks like Microsoft and Nvidia, and their hopes that the Federal Reserve will cut interest rates later this year — and not by fundamentals such as rising corporate profits .
Indeed, Dietrich compared the immense hype surrounding AI to the Internet mania during the dotcom bubble. He also pointed to the Buffett Indicator, which has risen to 188% this year – close to the 200% mark at which buying shares would be “playing with fire” in Warren Buffett’s eyes.
Additionally, the strategist noted that the price of gold has risen about 20% over the past year to record highs. He attributed that to institutional investors buying the safe haven because they expect a “major correction or stock market crash due to our vastly overvalued stock market and a slowing underlying economy.”
On the economic front, Dietrich argued that decades of excessive budget spending and artificially low interest rates have prevented a downturn.
He predicted that interest rates would remain high for years to combat persistent inflation, and that the government would be forced to raise taxes to tackle the rising budget deficit, driving down the prices of assets such as stocks and homes and creating an economic collapse would occur.
“No one seems to notice that the economy is cooling and that there are risks to the economy everywhere,” he said. “I still believe there is a good chance the economy will enter a mild recession this year.”
Dietrich noted that the S&P 500 typically plummets about 36% during a recession, and that the index would need to fall 12% from its current level of about 5,450 points to return to the 200-day moving average. For example, he warned that the index could fall by 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 coming recession. But it’s worth noting that Dietrich has been sounding the alarm for months, and neither the market nor the economy have been in serious trouble.
Read the original article on Business Insider
