The stock market is ready to “return to the meat grinder” this yr despite a recent minor rally, with the broad-based S&P 500 potentially falling 50% in the worst case, famous investor Jeremy Grantham warned on Tuesday.
Grantham, the 84-year-old co-founder of a Boston-based GMO asset management firm, informed customers in the letter that the “first and easiest phase of the bubble burst” in U.S. equities is now “finished” and the “most extreme froth” disappeared during last yr’s sell-off.
In accordance with his predictions, the S&P 500 would fall by about 17% to about 3,200 for the complete yr of 2023, which is about 20% after the market’s initial gains this yr. Nonetheless, in response to Grantham, the end result could possibly be much worse if the world economy plunges into a significant recession.
“Unfortunately, there are more downside potentials than upside potential,” Grantham wrote. “Within the worst case, if something goes flawed and the world is plunged into a major recession, the market could fall by 50 percent. At best, there’s prone to be a minimum of a further moderate decline that doesn’t offset the danger in any way.”
Grantham listed several aspects that would cause more trouble for investors, including a major correction in the US housing market and lingering uncertainty over the end result of the Russo-Ukrainian war.
![A worried NYSE trader](https://nypost.com/wp-content/uploads/sites/2/2023/01/stock-prediction-04.jpg?w=1024)
A 50% drop would bring the S&P 500 below 2,000 points from its current level of just over 4,000.
“On reflection, that might still be a much smaller percentage deviation from the trendline value than the over-70% over-pricing we had at the tip of 2021,” Grantham said. “So you should not be tempted to think it absolutely cannot occur.”
The S&P 500 is up about 5% this yr, a sign of cautious optimism amongst investors in regards to the economic outlook. That is despite a wave of layoffs hitting the tech sector, including giants like Microsoft and Amazon.
![A worried NYSE trader](https://nypost.com/wp-content/uploads/sites/2/2023/01/stock-prediction-03.jpg?w=1024)
Last yr, the broad-based index fell greater than 19% as Federal Reserve rate hikes and decades-high inflation dampened confidence.
Grantham said it was difficult to estimate the precise timing of a potential downturn given some positive aspects that would trigger a bear market “pause” – including the historical trend of strong returns ahead of the presidential election, signs of cooling inflation, solid employment markets and a rebound in China following a surge in COVID-19 cases.
“How significantly the corporate’s fundamentals deteriorate will mean all the pieces over the following twelve to eighteen months,” Grantham added.
Grantham, known for his bearish outlook, warned last September that investors would face “tragedy” when the present “superbubble” in US markets bursts.