S&P 500 is 'bizarrely overvalued' and could crash 49% as recession sets in, elite strategist says

  • The S&P 500 could plunge 49% when valuations normalize and a recession hits, Paul Dietrich said.
  • B. Riley Wealth chief strategist noted that economic and market indicators were flashing red.
  • Dietrich titled his latest comment "The stock market bubble is about to burst: watch out!"

The S&P 500 may fall to its lowest level since the pandemic hit as overloaded stocks retreat and a recession sets in, Paul Dietrich said.

B. Riley Wealth Management's chief investment strategist issued the alarming call in a comment titled "The Stock Market Bubble Is About to Burst: Watch Out!" He compared the shopping frenzy to the feverish demand for lottery tickets when the jackpot tops $750 million: "That's when everyone starts going crazy."

Dietrich cautioned against putting money into the market now, noting that stocks often rise before a recession hits and then quickly plunge. Bubbles can burst suddenly and disastrously because they are inflated by emotion and momentum, not based on fundamentals like profits or economic growth, he said.

The Wall Street veteran ran through a series of metrics and valuation indicators to argue that the stock was "strangely overvalued" and that trouble was brewing.

For example, he highlighted the S&P 500's historically high price-to-earnings ratio, its unusually low dividend yield, its high trading range, and its unviable discounted earnings growth.

"This bubble has reached this point," he said. "Basically, the stock market is priced on earnings growth that has only occurred 3% in the past, and that percentage has typically occurred when the economy was coming out of a severe recession."

Dietrich also noted a reading of more than 180% in the "Buffett Indicator", suggesting that the US stock market is greatly overvalued relative to the size of the economy. He argued that the price of gold rise to record levels He noted that investors were hedging against expensive stocks and a faltering economy.

Additionally, Dietrich noted that Warren Buffett's Berkshire Hathaway had amassed a record of 168 billion dollars of cash and liquid assets, companies' cash piles had increased and money market funds had seen unprecedented entriesindicating growing market concern.

He also cited recent stock sales by Amazon's Jeff Bezos, Meta's Mark Zuckerberg, and JPMorgan's Jamie Dimon.

"When the smart money is drying up as the market hits record highs, they are telling us something," he said.

'Slight recession'

Dietrich said the S&P 500 would have to fall 13% to return to its 200-day moving average and emphasized that the benchmark index fell an average of 36% during a recession.

"I still believe there is a strong possibility that the economy will enter a mild recession this year," he said. "That means we are likely to see a total drop of -49% from the current overvalued stock market."

The S&P 500 has risen more than 30% in the past year as inflation slowed below 4%, GDP growth remained above 3%, unemployment remained below 4% and the Federal Reserve indicated is preparing to cut interest rates.

Despite the better outlook for markets and the economy, Dietrich and other notable commentators Let's remain convinced that stocks will plummet and a recession will soon follow.

He recently said Business Insider that key economic indicators, such as consumer spending and employment data, were in "deep recession territory." In a December comment, he fired the idea that "the business cycle has been miraculously reversed" and that a bear market and recession were not inevitable.

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