Gary Shilling thinks there’s almost nothing that can stop a US recession this year.
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The legendary economist and Merrill Lynch alum laid out a grim outlook for markets and the economy in an interview with Business Insider this week. In his view, it’s almost inevitable that the US will tip into a recession this year, given ongoing vulnerabilities in multiple areas of the economy.
He’s also eyeing a big correction for stocks as valuations reach dizzying levels. Shilling said he believes the S&P 500 could end up tumbling by as much as 30%, with the bear-market decline potentially arriving by the end of the year.
Shilling said he believes the only things that could prevent a downturn at this point were a burst of fiscal stimulus or continued strength of the US consumer, both of which he thinks are unlikely.
He pointed to several signals suggesting the economy is on the verge of a downturn.
For one, the housing market remains largely frozen as markets expect interest rates to remain elevated. Despite a brief spike in existing home sales last year as mortgage rates dipped, buying activity has slowed significantly as rates have climbed higher in recent weeks.
Second, capital expenditures, a measure of investment by businesses into things like new hires and physical equipment, have collapsed across the private sector in recent years. While AI capex is booming, broader capex grew 3.9% at the end of last year, down from its peak of over 24% during the pandemic.
Consumer spending — which makes up around two-thirds of economic growth — has been a ballast for the US economy. Real personal consumption expenditures growth held steady at around a 2% yearly pace in March, but Shilling said it’s likely that spending will decline in the next year, given ongoing pressures on consumers.
Americans, who were already under the weight of cumulative price increases since the pandemic, are starting to feel the pain of the latest inflation surge from the Iran war. Energy prices increased 12.5% year-over-year in March, the largest increase since 2022 due to the surge in oil prices, according to the Bureau of Labor Statistics.
Real disposable income growth, meanwhile, slowed to a 0.4% yearly pace in March, its lowest level in about three years.
The annual personal savings rate also slowed to 3.6%, also its lowest level since 2022.
“That’s really on very thin ice in terms of income, in terms of people’s willingness to spend,” Shilling said.
Dizzying valuations
In markets, Shilling said he thinks valuations have swelled to worrying levels in recent years, pointing to three metrics in particular that suggested stocks were overvalued.
The first is the inflation-adjusted price-to-earnings ratio of the S&P 500, also known as the Shiller CAPE ratio, which is hovering at its highest level since before the dot-com crash.
The other two metrics — the price-to-sales and price-to-book ratios of the S&P 500 — tell a similar story, Shilling said, with both measures at all-time highs.
“Stocks are very expensive and there probably is a major correction coming somewhere in the relatively near future,” Shilling said, adding that his timeline for a correction was the end of 2026. “A decline of 20% or 30% is no big deal by historical standards. So I would say that’s probably in the cards.”
Shilling noted that it’s unclear what might trigger the decline in stocks. Market drops of that magnitude are typically caused by excesses in the market, though he now disagreed with the idea that the AI boom was necessarily a sign of excess.
“I’ve sort of made a career looking for those hidden flaws, and I don’t see anything right now that is just screaming for a big sell-off, but that doesn’t mean it isn’t there,” he said.
Shilling, known for his persistently bearish views in markets, has cautioned investors about potential recession and a broad decline in stocks for the last four years. Last year, he said the stock drop could be triggered by “extreme speculation” in financial markets, pointing to the hype around AI and crypto in particular.
