3 bearish market veterans explain why the S&P's latest highs could be short-lived

Business Insider

02-07-2025

The S&P 500 has rebounded to record levels as investors cheer a brighter horizon.
Some market watchers say the rally in stocks could stall as a recession and other risks loom.
David Rosenberg, Gary Shilling, and Steve Hanke are all skeptical of the bounce in stocks.
Relieved investors have fueled a record-breaking rally for the S&P 500 and are betting on further gains. They could be left disappointed, veteran market watchers say.
The benchmark US stock index plunged nearly 19% to below 5,000 points between February 19 and April 8 as President Donald Trump 's tariff threats stoked fears of a trade war and recession.
The S&P has rallied about 24% from that trough to fresh highs of around 6,200 points this week, marking a roughly $10 trillion increase in market value within three months.
The comeback reflects investors " pricing out bad news," David Rosenberg, the founder and president of Rosenberg Research, said in a client note on Monday.
The risks of a "global trade war, World War III coming out of the Middle East, or falling off the fiscal cliff in 2026 all appear to have been resolved," he wrote, referring to the Trump administration striking trade deals, Iran and Israel reaching a tentative ceasefire, and Trump's "big, beautiful bill," which the Senate passed Tuesday.
However, in an X post last week, the former chief North American economist at Merrill Lynch underscored just how ebullient investors are by ticking off the many assumptions being priced into stocks:
What is Mr. Market signaling? 1. Zero chance of recession. 2. No tariff damage; more reprieves at a minimum. 3. Peace in the Middle East. 4. Passage of the big beautiful bill. 5. Fed to start cutting right away and a go-for-growth Powell replacement ahead. 6. That equities…
— David Rosenberg (@EconguyRosie) June 26, 2025
Rosenberg outlined in his Monday note some of the reasons he's wary of the resurgence in stocks.
The S&P's forward price-to-earnings multiple has expanded by four points in three months, which has only happened 0.3% of the time since 1990. At 22, it's about 20% above the average over the past decade, despite real interest rates of 2.1% being much higher now than during previous market booms, he said.
The index's Shiller PE ratio, which uses inflation-adjusted earnings over the past 10 years to smooth out short-term volatility, has reached 37 — close to its December high and not far off its record 38.6 reading in November 2021, per Gurufocus data.
The Buffett indicator, which divides the total value of the US stock market by quarterly GDP, reached 198% as of Tuesday's close, Wilshire Indexes told BI. The measure is named after investor Warren Buffett, who once said buying stocks when the gauge exceeds 200% would be " playing with fire."
Recession risk
In his note, Rosenberg flagged recent declines in economic data, including new home sales, housing starts, goods exports, building permits, retail sales, real consumer spending, and industrial production.
He also said the US average tariff rate is now nearly 16%, or six times its level before Trump took office. He added that this was equivalent to a $2,000 tax hike for the average American household. The blow to their real incomes implies an almost 1% drag on GDP growth, matching the estimated impact of immigration curbs and deportation, he continued.
Rosenberg said these "various policy moves are tilting the US economy toward a recession." It is "no exaggeration to say that a consumer recession is forming," but there's "absolutely no fear out there in marketland," he added.
He's not the only commentator sounding the alarm. Gary Shilling, another veteran economist known for his bearish views, recently told the "Soar Financially" podcast that the S&P is in a "very vulnerable situation" and valuation metrics "tell you that stocks are very expensive." Despite these historical warning signs, stocks have powered through and hit record highs over the last few years.
The president of A. Gary Shilling & Co., who was Merrill Lynch's first chief economist, put the chances of a recession in the next year at 60% based on signs of a weakening consumer, flagging job market, and pressure on corporate profits.
Meanwhile, Steve Hanke recently told BI that while stocks have historically shrugged off geopolitical shocks, he's skeptical whether investors are right to assume the Iran-Israel conflict is settled following the Trump-brokered ceasefire in June. "I'm not so sure that they are right," he said.
The professor of applied economics at Johns Hopkins University added that a "multitude of dramatic policy changes" have fostered the greatest uncertainty for businesses and investors since the 1930s.