Gary Shilling says the S&P 500 may crash 30%, a recession will hit — and bitcoin and AI are both overhyped

Gary Shilling.

A. Gary Shilling & Co.

The S&P 500 may be headed for a 30% crash, a legendary market forecaster has warned.
Gary Shilling said stocks are “very expensive and very distorted,” and likely to disappoint buyers.
The top economist said he expects a recession this year, and both bitcoin and AI hype is overblown.

A legendary market prophet has warned the S&P 500 could crash 30% to a three-year low, the US economy is barreling toward a recession this year, and the buzz around bitcoin and AI is massively overblown.

“Stocks are very expensive and very distorted,” Gary Shilling told Business Insider in an interview. He compared the “tremendous weighting” of the “Magnificent Seven” in indices today to the “Nifty Fifty” group of stocks in the 1970s, noting high-flying members such as Kodak and Polaroid eventually plummeted in value.

“When people focus on a very narrow segment of the stock market, they in effect are saying the rest of the stock market just isn’t of interest and probably in trouble,” he said.

Merrill Lynch’s first chief economist, who quit the bank in 1978 to launch his own economic-consultancy and investment-advisory firm, said the S&P 500 could plunge below 3,500 points to its lowest level since late 2020.

The benchmark stock index tumbled 20% in 2022, but rebounded 24% last year, and has climbed another 4% this year to a record high of more than 4,900 points.

‘Nosebleed altitudes’

The president of A. Gary Shilling & Co., known for making several correct market calls over the past 40 years, also cautioned that stocks could disappoint for years to come.

They’ve returned an average of 12% a year including dividends since the market bottomed in 1982, but their future gains could falter thanks to modest economic growth and valuations at “nosebleed altitudes” today, he said.

The veteran forecaster predicted a recession this year, even though growth and employment data has been strong in recent months, inflation has dropped from over 9% at its peak to below 4% in recent months, and the Federal Reserve has penciled in several cuts to interest rates after hiking them from virtually zero to over 5% in under 17 months.

Shilling pointed to several “classic signs” of recession, including an inverted yield curve, protracted declines in leading economic indicators, and weakness in the Small Business Jobs Index. He also noted there’s only been a single soft landing since World War II, defining one as a period when the Fed has hiked and reduced interest rates without a recession taking hold.

The star economist said the Fed’s plan to hold off on cutting rates until it’s sure inflation is under control, companies’ labor hoarding limiting layoffs and likely delaying rate cuts, and longer-term headwinds including an aging population and tepid productivity gains, all supported the idea of a recession.

‘Excessive speculation’

Moreover, Shilling warned that US consumers have nearly exhausted their pandemic savings, based on recent increases in late payments on credit cards. He also flagged that the resumption of student-loan repayments would take more cash out of people’s pockets.

Shilling touched on two of the hottest market trends as well. He bemoaned the “really excessive speculation” fueling demand for bitcoin, slamming the leading cryptocurrency for having zero substance, suspicious beginnings, and appearing to only be useful for illegal transactions.

Meanwhile, he cast doubt on the idea that AI is a revolutionary technology that will supercharge productivity and accelerate growth — a belief that has propelled stocks like Nvidia and Microsoft to record highs. He questioned whether tasking huge computers with trawling through massive amounts of data to find patterns would result in much value at all.

It’s worth underscoring that Shilling has raised the alarm on stocks and the economy several times in recent months, yet both have defied his grave predictions and performed strongly.