If a recession hits in 2024, the biggest stock bubble since the dot-com boom will burst and the market will fall 40%, says a veteran strategist.

• A recession will hit in 2024, according to Paul Dietrich, chief investment strategist at B. Riley.

• Dietrich told Business Insider that even a mild recession could cause stock prices to plummet by as much as 40%.

• That’s because the market looks the most overvalued since the 2001 dot-com boom, he said.

With a recession likely in 2024 and investors playing in one of the most overvalued markets in over 20 years, even a modest economic slowdown could send stock prices plummeting. be.

says Paul Dietrich, chief investment strategist at B. Riley Wealth. U.S. stocks hit another record this week after a very positive earnings report from chipmaker Nvidia. But the more stocks rise, the more they will have to fall in a potential recession.

Dietrich expects a mild recession, but even a mild economic slowdown could cause stock prices to plummet by as much as 40%, sending the S&P 500 down to around 3,000.

“We’re still on the road to a recession,” Dietrich said in an interview with Business Insider, adding that even strong GDP this quarter won’t dampen confidence in the coming recession. he added. “We are very overvalued in the market right now.”

Optimism is growing across Wall Street as investors price in deep interest rate cuts this year and AI mania shows no signs of slowing down. Investors are expecting the Fed to cut interest rates by about 100 basis points, according to the CME FedWatch tool. Meanwhile, the economy has shown remarkable resilience over the past year, with growth estimated to be down about 2.9% this quarter, according to Atlanta Fed economists.

However, a closer look at the numbers reveals that the economic picture is not so rosy. Dietrich said many economic indicators are in “deep recession territory,” with signs of weakness in the job market and consumer spending.

Unemployment rates remain near record lows, but workers who have lost their jobs are having a hard time finding them back. Unemployment claims have hovered near 1.9 million since the start of 2024, a level Dietrich described as a “recession” in an earlier memo.

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Consumers also appear to be struggling to keep up with the pace of inflation and rising borrowing costs. Credit card debt hit a record high of $1.13 trillion in the fourth quarter, according to Federal Reserve data, and consumers are likely to reach their credit limit soon, a key driver of the economy last year. Dietrich warned that the brakes were on for what was coming.

Meanwhile, inflation is unlikely to return to the Fed’s 2% price target anytime soon, he predicted. Prices have cooled dramatically from their 2022 highs, but the government has printed huge amounts of money during the pandemic (about $2 trillion since Biden took office), and its inflationary effects have not fully permeated the economy. Probability is high.

“Once the money is allocated and spent, it takes about two years for inflation to really catch up. That’s why the last mile of inflation dropping to 2% is going to be very difficult and very slow. “I believe it could, and probably will, lead to the stagflation we saw in the ’70s,” Dietrich said, adding that the stagflation of the decade when economic growth slowed and prices soared. pointed out the crisis.

Dietrich cautioned that economic downturns, even mild ones, are never smooth sailing for stock investors. Even during the trough of the 2001 recession, GDP fell less than 1%, but stock prices plummeted 49% from peak to trough. Meanwhile, the overvalued Nasdaq Composite Index fell 78% from high to low as investors fueled a frenzy for internet stocks.

Stocks decline an average of 36% at the start of a recession, but Dietrich believes the market could fall even further today as he sees stocks as the most overvalued since 2001. . They haven’t been able to back up their valuations with earnings, but they could fall sharply if the economy goes into recession, he said.

“The current stock market rally is based on the strength of the seven mega-cap tech stocks and excited bets on when the Fed will cut interest rates. “The economy is everywhere,” Dietrich said in an earlier memo.

New York Fed economists are pricing in a 61% chance of the economy slipping into recession by next January. One little-known economic indicator estimates the probability of a recession at about 85%, the highest recession risk recorded since the Great Financial Crisis.

Read the original article on Business Insider