Gary Shilling: 30% Stock Drop Is Coming

What You Need to Know

The recession will likely linger but not become disastrous, he said.
Shilling expects a 40% peak-to-trough decline in the S&P 500.
At Wednesday’s close, the S&P was down about 14% from its January 2022 peak.

Economist and investment advisor A. Gary Shilling is sticking with his year-ago forecast that the stock market will experience a roughly 40% peak-to-trough decline and predicts most of the slide will happen in 2023.

Based on a 40% drop from the S&P 500′s peak in January 2022, Shilling’s outlook suggests the index could slide roughly 30% from Wednesday’s close. Despite the stormy stock outlook and his expectations for an extended recession, however, Shilling doesn’t expect a disastrous economic downturn.

“The S&P 500 index is down 15% from its early-2022 top as rising interest rates hammered stock valuations. The bulk of the decline, we believe, will occur this year as the unfolding recession decimates corporate earnings,” Shilling wrote in his monthly Insight newsletter released early Wednesday afternoon.

“With hope springing eternal, many equity investors continue to believe that a recession, or at least another leg down in the equity bear market, will be avoided. That’s despite the Fed’s continual statements that it is resolved to kill inflation … regardless of the negative consequences for the economy,” Shilling wrote.

“Nevertheless, economic and financial data that normally led business downturns indicate that the U.S. economy is either already in or close to a business downturn.”

Consumer spending, which accounts for 70% of gross domestic product, is falling in real terms, as are wages, and households continue to expect lower inflation, Shilling said.