- The S&P 500 will plunge 32% in 2025 as a recession finally hits the US economy, BCA Research predicts.
- The firm said the Fed will fail to prevent a recession as it takes its time cutting interest rates.
- Rising unemployment and constrained credit will curb consumer spending, worsening the downturn.
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The stock market will crash 32% in 2025 as the Federal Reserve fails to prevent a recession, according to the most bearish strategist on Wall Street.
Peter Berezin, chief global strategist at BCA Research, said in a recent note that a recession will hit the US economy later this year or in early 2025, and the downturn will send the S&P 500 tumbling to 3,750.
"The consensus soft-landing narrative is wrong. The US will fall into a recession in late 2024 or early 2025. Growth in the rest of the world will also slow sharply," Berezin said.
Part of Berezin's bearish outlook is based on the idea that the Fed will "drag its feet" in cutting interest rates, and the central bank will only meaningfully loosen financial conditions until a recession is apparent.
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By then, it will be too late.
Berezin highlighted that the labor market is weakening as job openings decline materially from their post-pandemic peak. An ongoing decline in the quits rate, hiring rate, and recent downward revisions to the April and May jobs report also point to a slowing labor market.
"Two years ago, workers who lost their jobs could simply walk across the street to find new work. That has become increasingly difficult," Berezin said.
The June jobs report showed the unemployment rate ticking higher to 4.1% from 4.0%, yet another sign of some mild weakness in the jobs market.
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Rising unemployment could ultimately lead to consumers reducing their spending to build up their "precautionary savings," Berezin said, and that will happen as consumers' ability to borrow money narrows due to rising delinquency rates.
Ultimately, a negative feedback loop will develop in the broader economy, which will send the stock market reeling.
"With little accumulated savings to draw on and credit availability becoming more constrained, many households will have little choice but to curb spending. Decreased spending will lead to less hiring. Rising unemployment will curb income growth, leading to less spending and even higher unemployment," Berezin explained.
And perhaps most importantly, the Fed's plan to blunt any economic decline via interest rate cuts simply won't work.
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"It is important to recognize that what matters for the economy is not the fed funds rate per se, but the interest rate that households and businesses actually pay," Berezin said.
For example, the average mortgage rate paid by consumers is around 4%, compared to current mortgage rates of around 7%.
That means even if the Fed cuts interest rates and mortgage rates decline, the average mortgage rate paid by consumers will continue to rise.
That principal also applies to businesses and the loans they hope to refinance in the coming years.
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"These dynamics will trigger more defaults, causing pain for the banking systems. The problems that affected regional banks last year have not gone away," Berezin said.
