Stocks face 50% freefall in meat grinder, says Jeremy Grantham

The stock market is set to go “back to the meat grinder” this year despite a recent minor rally, with the broad-based S&P 500 potentially plummeting by 50% in a worst-case scenario, famed investor Jeremy Grantham warned Tuesday.

Grantham, the 84-year-old co-founder of Boston-based asset management firm GMO, told clients in a letter that the “first and easiest leg of the bursting of the bubble” in US stocks is now “complete,” with “the most extreme froth” wiped out during last year’s selloff.

Under his projections, the S&P 500 would plunge by about 17% to approximately 3,200 for the full year of 2023, or about 20% after early gains in the market so far this year. But the outcome could be far worse if the global economy topples into a significant recession, according to Grantham.

“Regrettably there are more downside potentials than upside,” Grantham wrote. “In the worst case, if something does break and the world falls into a severe recession, the market could fall a stomach-turning 50% from here. At best there is likely to be at least a further modest decline, which by no means balances the risks.”

Grantham cited several factors that could lead to more pain for investors, including a major correction in the US housing market and lingering uncertainty about the outcome of the Russia-Ukraine war.

A decline of 50% would take the S&P 500 below 2,000 points, down from its current level of just over 4,000.

“To put this in perspective, it would still be a far smaller percent deviation from trendline value than the overpricing we had at the end of 2021 of over 70%,” Grantham said. “So you shouldn’t be tempted to think it absolutely cannot happen.”

The S&P 500 has rallied about 5% this year in a sign of cautious optimism among investors about the economic outlook. That’s despite a wave of layoffs hammering the tech sector, including giants such as Microsoft and Amazon.

Last year, the broad-based index plunged more than 19% as Federal Reserve rate hikes and decades-high inflation sapped confidence.

Grantham asserted the exact timing of a potential downturn is difficult to assess, given some positive factors that could prompt a “pause” in the bear market — including a historic trend of strong returns ahead of presidential elections, signs of cooling inflation, a robust jobs markets and China’s rebound from a surge of COVID-19 cases.

“How significantly corporate fundamentals deteriorate will mean everything during the next twelve to eighteen months,” Grantham added.

Known for his bearish outlooks, Grantham cautioned last September that investors faced “tragedy” when a current “super-bubble” in US markets bursts.