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Here’s The Worst Case Scenario For Stocks, According To Goldman, Deutsche Bank And Bank Of America

Forbes logo Forbes 5/19/2022 Sergei Klebnikov, Forbes Staff

Topline

Amid heightened recession fears, major Wall Street firms now warn that the ongoing market selloff, which is on track for seven consecutive weeks of losses, could get much worse—with stocks set to plunge by another 20% or so if the economy heads towards a looming recession.

One top strategist sees stocks falling by another 24% if the economy falls into a recession. Bryan R. Smith/AFP via Getty Images © Provided by Forbes One top strategist sees stocks falling by another 24% if the economy falls into a recession. Bryan R. Smith/AFP via Getty Images

Key Facts

Recession fears have spiked this week, after major retailers warned about inflationary pressures eating into quarterly profits and the Federal Reserve pledged that it “won’t hesitate” to keep raising interest rates until surging prices come back down.

The S&P 500 could plunge to 3,000 if the economy falls into a recession in the near future, which would amount to a roughly 24% drop from the index’s current level of around 3,900, according to a recent note from Deutsche Bank’s chief U.S. equity and global strategist, Binky Chadha.

While he has a 4,750 price target for the S&P 500 (over 20% higher than current levels) and predicts a “relief rally” by year-end, there are risks that a “protracted selloff” could slide into a “self-fulfilling recession,” Chadha said.

Market losses could intensify if the economy falls into a recession, notes Goldman Sachs chief U.S. equity strategist David Kostin, who puts the odds of a downturn within the next two years at 35%.

He points to historical data showing that across 12 recessions since World War II, the S&P 500 has fallen by a median 24% and average 30%: Based on that pattern, the stock market could fall by another 11% to 18% from current levels, Kostin predicted in a recent note.

Strategists at Bank of America, meanwhile, warned of a stagflation scenario—slowing economic growth and high prices—that could create a “worst case” scenario for stocks where the S&P 500 falls to 3,200, a roughly 18% drop from current levels.

Crucial Quote:

“Inflation is proving sticky and the Fed’s forward guidance is for a rate hiking cycle that has historically ended in recession more often than not (8 of 11 or 73% of the time), with the Fed acknowledging and accepting this risk,” Deutsche Bank’s Chadha said.

What To Watch For:

The recent market selloff, coupled with the prospect of aggressive rate hikes from the Federal Reserve as it tries to combat inflation, has certainly “raised recession fears,” says Moody’s Analytics chief economist Mark Zandi. He puts the odds of a recession at 33% in the next 12 months and nearly 50% within 24 months, higher than some of his peers.

Tangent:

Investors should be wary as “recession risks are taking over” in markets, according to Savita Subramanian, Bank of America’s equity and quant strategist, in a recent note. Not only are chances of a stagflation environment rising, but current market conditions are reminiscent of the 1999-2000 dot-com bubble, which was characterized by an “acceptance of the unthinkable,” she says.

Further Reading:

Investors Have ‘Nowhere To Hide’ As S&P 500 Nears Bear Market Territory (Forbes)

Dow Falls 1,100 Points, Stock Market Selloff Continues As Major Retailers Warn Of Rising Cost Pressures (Forbes)

Dow Jumps 400 Points After Powell Says Fed ‘Won’t Hesitate’ To Keep Raising Rates To Combat Inflation (Forbes)

Warren Buffett’s $51 Billion Stock Market Shopping Spree: Here’s What He’s Buying (Forbes)

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