The S&P 500 could plummet by 50% when the stock-market bubble bursts and the US economy slides into recession, Paul Dietrich warns.
"I believe the upcoming recession will result in a deeper stock market decline than we experienced in 2000 and 2008," says B. Riley Wealth Management's chief investment strategist in his latest monthly commentary.
Dietrich outlines several warning signs that indicate stocks are significantly overvalued and nearing a correction. He highlights the S&P 500's price-to-earnings ratio and inflation-adjusted Shiller PE ratio, both at multi-decade highs, excluding past recessions. Additionally, the index's historically low dividend yield of 1.35% raises concerns.
Dietrich also notes that recent market gains have been driven by investors' enthusiasm for a few stocks like Microsoft and Nvidia, and their expectations of a Federal Reserve interest rate cut later this year — rather than by strong corporate earnings.
Comparing the current AI hype to the internet mania of the dot-com bubble, Dietrich flags the Buffett Indicator, which has surged to 188% this year. According to Warren Buffett, buying stocks when the indicator approaches 200% is "playing with fire."
Moreover, Dietrich observes that gold prices have soared about 20% to record highs over the past year. He attributes this to institutional investors seeking a haven asset, anticipating a "major correction or stock market crash due to our wildly overvalued stock market and a slowing economy."
On the economic front, Dietrich argues that decades of excessive fiscal spending and artificially low interest rates have postponed a downturn.
He predicts that interest rates will remain elevated for years to combat persistent inflation, and the government will be forced to raise taxes to address its growing budget deficit. This, in turn, will lower the prices of assets like stocks and houses, triggering an economic slump.
"No one seems to notice that the economy is cooling and there are risks everywhere," he says. "I still believe there is a strong possibility the economy will go into a mild recession this year."
Dietrich notes that the S&P 500 typically falls by about 36% during a recession. To return to its 200-day moving average, the index would need to drop 12% from its current level of around 5,450 points. Thus, he warns the index could plunge up to 48% to approximately 2,800 points — its lowest level since the Covid crash in spring 2020.
Dietrich is among several top forecasters predicting trouble ahead for stocks and a recession. However, it's important to note that despite his warnings for months, neither the market nor the economy has encountered significant issues yet.
