Renowned economist Gary Shilling has reportedly issued a stark warning about an impending recession in the U.S., forecasting a significant downturn in the stock market.

S&P 500 Could See A Major Correction, Warns Shilling

According to a report by Business Insider, Shilling predicts that the S&P 500 could drop by as much as 30% by the end of the year.

Shilling attributes the potential recession to ongoing economic vulnerabilities, noting that only a substantial increase in fiscal stimulus or strong consumer spending could prevent it.

However, he views both scenarios as unlikely. The housing market is sluggish due to high interest rates, and capital expenditures have sharply declined, despite a rise in AI-related investments.

Consumer Spending Under Strain

Consumer spending, a key driver of economic growth, is under strain. Real personal consumption expenditures grew by 2% in March, but Shilling expects a decline due to inflationary pressures worsened by the Iran war.

"That’s really on very thin ice in terms of income, in terms of people’s willingness to spend," Shilling said.

Energy prices surged 12.5% year-over-year in March, the largest increase since 2022, according to the Bureau of Labor Statistics.

Shilling also points to inflated stock valuations, with the S&P 500’s Shiller CAPE ratio at its highest since the dot-com crash. He warns of a potential 20% to 30% market correction by the end of 2026, though he remains uncertain about the exact trigger.

He also added that capital spending outside of the AI buildout has weakened sharply, with broader capex growth running 3.9% at the end of last year versus a pandemic-era peak above 24%.

Growing Concerns About US Economy

The warning from Shilling comes amid growing concerns about the U.S. economy’s resilience. In March, Moody’s Analytics Chief Economist Mark Zandi highlighted the impact of rising oil prices due to Middle East tensions, suggesting that a recession is increasingly likely. He noted that if oil prices remain high, a recession could be inevitable.

Additionally, a recent poll revealed that over half of Americans feel their financial situation is worsening, with 55% reporting deteriorating finances due to war-driven inflation. This marks the highest level of financial pessimism since Gallup began tracking the issue in 2001.

Furthermore, Goldman Sachs recently raised the U.S. recession probability to 25%, citing the cooling labor market and the external shock from the Iran conflict as significant factors complicating the Federal Reserve’s strategy.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.