- Paul Dietrich said the S&P 500 could collapse 49% if valuations normalize and a recession hits.
- B. Riley Wealth's chief strategist flagged market and economic indicators that were flashing red.
- Dietrich titled his latest commentary, “The stock market bubble is about to burst – watch out!”
Paul Dietrich said the S&P 500 could sink to its lowest level since the pandemic crash as overstretched stocks recede and a recession begins.
B. Riley Wealth Management's chief investment strategist made the alarming call in a commentary titled, “The Stock Market Bubble is About to Burst — Watch Out!” “That's when everyone starts going crazy,” he said, likening the buying frenzy to the frenzied demand for lottery tickets when the jackpot exceeded $750 million.
Dietrich cautioned against putting money into the market now, noting that stock prices often spike before a recession and then fall soon after. Bubbles were not built on fundamentals such as profits or economic growth, but were inflated by emotion and momentum, and could burst suddenly with dire consequences, he said.
The Wall Street veteran looked at a number of flashing valuation metrics and metrics to argue that stocks are “bizarrely overvalued” and that trouble is looming.
For example, he pointed to the S&P 500's historically high price-to-earnings ratio, unusually low dividend yield, high trading range, and unrealizable embedded earnings growth.
“This bubble has come so far,” he said. “Stock markets fundamentally price in earnings growth, which has only happened by 3% in the past, and that rate typically occurs when the economy is emerging from a deep recession. ”
Dietrich also pointed out that the Buffett Index is over 180%, suggesting that the U.S. stock market is significantly overvalued relative to the size of the economy. He argued that gold's rally to record highs showed investors were protecting themselves from overvalued stocks and a weak economy.
Additionally, Dietrich said Warren Buffett's Berkshire Hathaway has amassed a record $168 billion in cash and liquid assets, the company's cash pile has swelled and there has been an unprecedented inflow into money market funds. He emphasized that market concerns are growing.
He also mentioned recent stock sales by Amazon's Jeff Bezos, Meta's Mark Zuckerberg and JPMorgan's Jamie Dimon.
“When markets hit record highs and smart money sells, they're telling us something,” he said.
“Mild recession”
Dietrich said the S&P 500 would need to fall 13% to return to its 200-day moving average, highlighting that the benchmark index has fallen an average of 36% during the recession.
“We still think it is likely that the economy will slip into a mild recession this year,” he said. “That means a total potential decline of -49% from the current overvalued stock market.”
Inflation has slowed to below 4%, gross domestic product (GDP) growth is above 3%, unemployment is below 4%, and the US Federal Reserve has signaled it is preparing to cut interest rates. The S&P 500 index has soared more than 30% over the past year.
Despite the improved market and economic outlook, Dietrich and other top commentators remain convinced that stock prices will collapse and a recession will soon be in the offing.
He recently told Business Insider that key economic indicators such as consumer spending and employment statistics are in “deep recession territory.” “The business cycle has miraculously broken,” he said in a December commentary, rejecting the idea that a bear market or recession is inevitable.
