• The S&P 500 may crash 49% when valuations normalize and a recession hits, Paul Dietrich said.

• B. Riley Wealth’s chief strategist flagged market and economic indicators that were flashing red.

• Dietrich titled his latest commentary “The Stock Market Bubble Is About to Burst — Look Out!”

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

B. Riley Wealth Management’s chief investment strategist issued the alarming call in a commentary titled “The Stock Market Bubble Is About to Burst — Look Out!” He compared the buying frenzy to the feverish demand for lottery tickets when the jackpot passes $750 million: “That’s when everyone starts to go insane.”

Dietrich cautioned against putting money into the market now, noting that stocks often surge before a recession hits and then promptly plunge. Bubbles can pop suddenly and disastrously because they’re inflated by emotion and momentum, not built on fundamentals such as earnings or economic growth, he said.

The Wall Street veteran walked through a raft of flashing valuation metrics and indicators to make his case that stocks were “bizarrely overvalued” and trouble was coming.

For example, he flagged the S&P 500’s historically high price-to-earnings ratio, unusually low dividend yield, elevated trading range, and infeasible priced-in earnings growth.

“This is how far this bubble has gone,” he said. “The stock market is basically priced for earnings growth that has only happened 3% in the past, and that percentage has generally happened when the economy was coming out of a severe recession.”

Dietrich also pointed to a 180%-plus reading on the “Buffett Indicator,” which suggests the US stock market is heavily overvalued relative to the size of the economy. He argued that gold’s surge to record highs signaled investors were taking cover from expensive stocks and a faltering economy.

Story continues

Moreover, Dietrich highlighted that Warren Buffett’s Berkshire Hathaway had amassed a record $168 billion of cash and liquid assets, corporate cash piles had swelled, and money-market funds had seen unprecedented inflows, indicating rising 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 selling out as the market is hitting record highs — they are telling us something,” he said.

‘Mild recession’

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

“I still believe there is a strong possibility the economy will go into a mild recession this year,” he said. “That means it is possible we could see a total drop from the current overvalued stock market of -49%.”

The S&P 500 has jumped over 30% in the past year as inflation has slowed below 4%, GDP growth has remained above 3%, unemployment has stayed under 4%, and the Federal Reserve has signaled it’s getting ready to cut interest rates.

Despite the improved outlook for markets and the economy, Dietrich and other top commentators remain convinced that stocks will crash and a recession will strike soon.

He recently told Business Insider that key economic indicators such as consumer spending and employment data were in “deep recession territory.” In a December commentary, he dismissed the idea that “the business cycle has been miraculously repealed” and that a bear market and recession weren’t inevitable.

Read the original article on Business Insider