Bearish voices on Wall Street are raising concerns about a potential stock market crash as economic indicators signal a cooling trend. Despite the S&P 500 nearing record highs, these strategists warn that underlying risks are mounting.
Key recession indicators, like the Sahm Rule, have recently been triggered, and the job market's growth is slowing. Even anticipated interest rate cuts from the Federal Reserve might not be enough to stave off a downturn, according to pessimistic forecasters.
From a looming recession to the possibility of a 70% market decline, here’s a breakdown of the latest bearish forecasts dominating Wall Street.
Billionaire investor Mark Mobius pointed out on CNBC that the significant drop in M2 money supply since its peak in 2022 marks the largest contraction in nearly a century.
“The concern is that if M2 money supply has been shrinking since April 2022 and hasn't kept up with economic growth, there could be less capital available for the discretionary spending that’s fueled the current bull market,” Mobius explained.
Mobius advises investors to maintain 20% of their portfolios in cash to take advantage of potential buying opportunities in a downturn. He suggests focusing on companies with little or no debt, moderate earnings growth, and high return on capital, to be well-positioned for re-entering the market.
Economist Steve Hanke echoed these concerns, adding that the contraction in M2, along with other signs, suggests a recession could hit by early 2025.
“We expect to enter a recession either late this year or early next year in the United States, which is why we believe inflation will continue to decline,” Hanke told Wealthion.
Hanke pointed to several micro-level indicators that support this view, including a steady rise in the unemployment rate to 4.3%, the highest since the pandemic, along with sluggish retail sales, housing market, and manufacturing activity.
“If you look at the microdata, it aligns with the macroeconomic picture of a slowdown leading to a recession, with inflation continuing to ease. Sector by sector, the signs point to a downturn,” Hanke added.
A 70% stock market decline could be on the horizon if a severe recession hits, especially given the current high valuations, warns Jon Wolfenbarger, founder of BullAndBearProfits.com.
In a recent note, Wolfenbarger highlighted that beyond the inverted yield curve and the flashing of the Sahm Rule, there are less obvious signals indicating a cooling jobs market, which often precedes economic downturns.
He pointed to the year-over-year change in employment growth dropping to 0%, noting that a negative reading in this metric has historically signaled a recession.
Another red flag is the ongoing decline in average weekly hours worked, now at around 34.2. Any further decrease in this indicator would be reminiscent of the 2008 and 2020 recessions.
Furthermore, the ISM Index's steady decline in manufacturing employment suggests the unemployment rate could continue to rise, according to Wolfenbarger.
Given the elevated stock market valuations, these factors lead Wolfenbarger to predict that the S&P 500 could potentially drop by as much as 70% from current levels.
However, not all of Wall Street shares this bearish outlook. Goldman Sachs recently dismissed recession fears as "overblown," citing the resilience of US consumers and strong corporate earnings growth.
“Concerns about the US consumer are exaggerated,” said Goldman’s Jan Hatzius. “Our sentiment measure around consumer earnings calls improved, sales growth at consumer-facing companies remains healthy, and real income growth appears solid across all income groups.”
Goldman Sachs also noted the Federal Reserve's shift towards a more dovish stance, with expected interest rate cuts likely on the horizon.
The bank suggested that trillions of dollars in cash on the sidelines could flood the stock market, potentially driving the S&P 500 up 7% to 6,000 after the Presidential election in November.
“SPX $6K - new highs in Q4, led by November and December,” Goldman Sachs predicted.
