Gary Shilling, a market prophet, predicts an S&P 500 decline and a 2025 recession.

The stock market has been a letdown for investors for decades, and a famous market forecaster has predicted that a recession might start this year and last until 2025. Gary Shilling predicted in his February Insight newsletter that the S&P 500 will likely show lower returns moving forward, despite the fact that it had gained an average of 12.3% a year including dividends since bottoming out in July 1982.

The first top economist at Merrill Lynch, who started his own advice and consulting business in 1978, is famous for having predicted many big market movements in the last half-century.

Slower real economic growth, reflecting moderate advances in the labor force and productivity, as well as an ageing population that saves more and spends less, would hold down stocks, according to Shilling's most recent forecast. Nominal gains in stock prices would be dampened by slower inflation, according to the president of A. Gary Shilling & Company.

Also, as Shilling pointed out, the price-to-earnings ratio of the S&P 500 for the past 12 months is 24.8, which is much higher than the long-term average of 17.3. This indicates that stocks are being overvalued in relation to company profits. Additionally, he warned that market irrationality and carelessness will eventually go away.

A key reason that stock prices are elevated and likely to be subdued in future years is the demise of widespread speculation," according to him. "Despite the collapse of FTX and accusations of fraud by its founder and head, Sam Bankman-Fried, many continue to rush into securities with little or no substance."

Cryptocurrencies, according to Shilling, are a distraction for investors and a productivity killer. A decline in Wall Street's "fear index," the CBOE Volatility Index, following the epidemic, he claimed, indicated "investor complacency and a switch from fear to greed, as do elevated stock prices."

As more proof of over-optimism and impending problems, he pointed to analysts' optimistic profit projections, the shrinking ratio of negative to positive call options, and the extreme concentration of investor capital in the "Magnificent Seven" companies.

When it comes to the economy, Shilling said that firms are reluctant to lay off workers due to labor hoarding, which has delayed wage cuts and layoffs. This is because, she said, "as a result, the overall economic softness — or, more likely, a recession — may well stretch into next year."

Remember that Shilling has been sounding the alarm about a recession on many occasions in the past few months, predicting that the S&P 500 may fall by 30% or more. Having said that, the US economy expanded solidly by 3.3% in the fourth quarter, and the benchmark stock index has rocketed to new highs.