The stock market could plunge as much as 27% when the economy finally tips into recession, investment research firm says

A downturn could cause stocks to plummet as much as 27%, BCA Research predicted.
A downturn could cause stocks to plummet as much as 27%, BCA Research predicted.Thomson Reuters
  • The S&P 500 could soon face its worst crash since 2008, BCA Research said in its 2024 outlook.

  • That's because the US economy remains on track to enter a recession as high interest rates take a toll.

  • A downturn could cause stocks to plummet as much as 27%, the investment research firm predicted.

The stock market could crater by more than 25% next year, thanks to higher-for-longer interest rates taking a bite out of economic activity and finally tipping the US into a recession, according to BCA Research.

While forecasts have grown more upbeat as the US heads into year-end, the US is still on track to hit a recession at some point, which spells trouble for the near-term fate of the stock market.

"A recession in the US and euro area was delayed this year but not avoided. Developed markets (DM) remain on a recessionary path unless monetary policy eases very significantly. As such, the risk/reward balance is quite unfavorable for stocks," strategists said.

When the economy finally tips into a downturn, that could drag the S&P 500 as low as 3,300, strategists predicted, implying as much as a 27% fall from the index's current levels.

A decline that steep would mark the worst year for investors since 2008, when the benchmark index plunged 38% in the wake of the Great Financial Crisis.

That plunge could also come sometime within the next year, as a recession is set to arrive in mid-2024, BCA strategists predicted, unless the Fed has reason to ease monetary policy "considerably." That's unlikely though, as inflation is unlikely to fall quickly enough:

"We remain in the disinflationary camp, but expect that inflation will not slow quickly enough for the Fed and the ECB to cut rates in time to prevent a significant rise in unemployment," strategists said. "Unless a recession occurs imminently or inflation completely collapses, the Fed is unlikely to cut rates before next summer."

Economists have been warning of a potential recession since 2022, when central bankers began to aggressively raise interest rates to tame high inflation. Higher rates risk overtightening financial conditions and pushing the economy into a downturn — and the effects of Fed rate hikes are already beginning to flash a number of warning signs across the economy.

Lending conditions are tightening under the influence of higher-for-longer interest rates, leading some experts to warn of a coming default cycle on the horizon.

"Cracks" also appear to be forming in the job market as firms slow their pace of hiring, BCA strategists said. The US added 150,000 jobs during the month of October, considerably less than the 297,000 jobs added the prior month.

American consumers also look to be running out of steam after a summer of frenzied spending. While Black Friday sales may have posted record numbers, households have largely drawn down their excess savings from the pandemic, and monthly retail sales in October posted their first decline in seven months — a possible sign that a consumer-led slowdown is on the horizon, some strategists say.

Still, investor sentiment has perked up in recent weeks as stocks continue to rally higher and markets see the Fed slashing interest rates next year. A dream economic scenario could cause the S&P 500 to notch a new record in 2024, Deutsche Bank, Bank of America, and RBC Capital Markets recently predicted.

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