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The US stock market is having a field day. The S&P 500 has increased by 14%, while the NASDAQ has experienced a gain of 18%.
Many analysts are still bullish for the rest of the year, but risks remain. Some economists have already warned that the US stock market might crash next year. Let’s try to uncover why.
Analysts on Recession: Possible Reasons
BCA strategist Roukaya Ibrahim has recently warned that stock markets might see a reversal of fortunes as early as next year. She sees a 30% drop in overall valuations as significant downside risks remain to be addressed.
In an interview with Bloomberg TV, she mentioned that the S&P 500 can drop to 3,600 when the next recession hits. She said that while the job markets look strong, the unemployment rate is expected to rise. It is important to mention that corporate bankruptcies rose 88% in April, marking the highest level in the past 12 months.
US Job Cuts To Increase
Around nine companies worth $50 million filed bankruptcy, and this number is expected to reach 25 in the coming days, as per veteran analyst Danielle DiMartino Booth.
Small businesses have already started to bear the brunt of tightening financial conditions. Ten percent of small business owners cited rising labor costs as their “single most important problem.” Meanwhile, many firms have reported reducing their hiring, as seen by 63,000 employers making job cuts in May.
Is 30% US Stock Correction Expected?
Gary Shilling, a former chief economist at Merill Lynch and now president of A. Gary Shilling & Co., has warned of a similar 30% correction in stocks. He says that the price of scrips is extremely high when compared to corporate earnings and other assets such as Treasury bonds.
Shilling claims that the price-to-earnings ratio, one of the best metrics to gauge the health of stocks, is almost 45% higher, eventually highlighting overvaluation. Due to systemic risk, any large company getting into trouble can trigger a chain reaction that can cause the S&P 500 to drop below 3,500 points. Debt problems, a prolonged contraction in the leading economic index, housing market problems, a weak consumer base, and falling confidence were some of the main reasons for this gloomy outlook.
Is the US Economy a Bubble?
The recent voice joining the chorus of warnings is that of famous economist Harry Dent. He believes the U.S. stock market currently represents a “bubble of all bubbles” as debt-fuelled growth keeps the investor sentiment bullish.
As with all the bubbles, they burst once they reach a certain point. In this case, Dent estimates that the S&P 500 can lose around 86% of its value while the Nasdaq can fall 92%.
Warning against the stellar rise in Nvidia’s stock, he sees it dropping 98% in case of a stock market crash – which seems an exaggeration. Interestingly, according to Dent, this bubble has been building up for the past 14 years, more than the usual 5-6 years. This has primarily been possible because of the trillions of stimulus, $27 trillion to be precise, that has caused a debt problem in the US.
Will the US Stock Market Crash in 2025?
Will the stock markets crash next year or not? Marc Ostwald, Chief Economist at ADM ISI, told Techopedia:
“The risks are starting to pile up. Recall the example of the French election, the Fed overplaying high for longer, and the soft landing evaporating. China continues failing to engineer a solution to the debilitating property crisis. The corrosive impact on consumer confidence is due to weak or flat wage growth, while geopolitics prompting renewed supply disruption.”
Even if it is not a crash, Ostwald certainly sees a correction. Whether it’s sometime later this year, perhaps related to the US election, the risk of a sharp correction is due to complacency.
Is There a Glimpse of Hope?
Paul Hickin, an independent markets expert, was hopeful. He told Techopedia:
“China’s economic health remains uncertain, and persistent US inflation and high interest rates will take their toll on the outlook. However, if other economies recover, that could soften the blow.”
While many analysts remain bullish, it is important to maintain sight of these critical tailrisks.
