Despite the year’s gains thus far, one analyst believes a stock market crash may be imminent. Indeed, Paul Dietrich, Chief Investment Strategist at B. Riley, believes the S&P 500 could sink as much as 48% when the bubble bursts and a recession takes root in the country.
According to Dietrich, the market is massively overvalued currently. He predicts that as taxes rise — and as inflation and interest rates remain elevated — the U.S. economy will sink into a devastating recession.
“I believe the upcoming recession will result in a deeper stock market decline than we experienced in 2000 and 2008,” Dietrich said in his June monthly commentary.
Dietrich believes that the S&P’s price-to-earnings (P/E) ratio and inflation-adjusted Shiller P/E ratio — each of which are at “multi-decade highs” — suggest that stocks are grossly overvalued right now, potentially pointing to a bubble in progress. In fact, Dietrich compared the speculation surrounding artificial intelligence (AI) with the dot-com bubble of the early 2000s.
Dietrich Focuses on Stock Market Crash Indicators
As Business Insider reports, Dietrich also noted the state of the Buffett Indicator, which recently reached a two-year high of 184%, further signaling overvaluation in the market. The Buffet Indicator uses the combined market capitalization of all actively traded U.S. stocks divided by the latest quarterly gross domestic product (GDP) estimate. This helps gauge the value of the stock market relative to the size of the economy.
Dietrich believes the economy and market have been artificially propped up by near-0% interest rates through much of the pandemic. He argues that higher interest rates and the government raising taxes to deal with a rapidly rising budget deficit are a recipe for an economic slump.
“No one seems to notice that the economy is cooling and there are risks to the economy everywhere,” Dietrich noted. “I still believe there is a strong possibility the economy will go into a mild recession this year.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
