Paul Dietrich, chief investment strategist at B. Riley Wealth Management, said that when the stock market bubble bursts and the U.S. economy enters into a recession, the S&P 500 index (SPX) may be halved from its current level.

Dietrich said in his latest monthly commentary, "I believe the upcoming economic slowdown will cause more severe declines in the stock market than in 2000 and 2008."

Dietrich detailed the warning signals that the U.S. stock market is severely overvalued and will soon face a correction. For example, he pointed out that both the price-earnings ratio and the Schiller P/E ratio (adjusted for inflation and excluding past recessions) of the S&P 500 index are at their highest levels in decades, while the benchmark index's dividend yield is at a historic low of only 1.35%.

"Schiller P/E ratio" was proposed by Robert Shiller, one of the winners of the 2013 Nobel Prize in Economics. It is a cyclically adjusted price-earnings ratio (CAPE) that excludes inflation, and calculates the average profit of the past 10 years to replace the profit of the past year in the ordinary P/E ratio, smoothing the impact of economic cycles on valuation for more accurate estimation.

Dietrich also pointed out that the recent rise in U.S. stocks is mainly due to investors' excitement about a few stocks such as Microsoft and Nvidia, as well as their hope that the Federal Reserve will cut interest rates later this year, rather than rising corporate earnings and other fundamentals.

In fact, Dietrich likened the market's AI frenzy to the Internet bubble era. He also mentioned the Buffett indicator, which has risen to 188% this year - close to the threshold of 200%, which Buffett believes is playing with fire when buying stocks.

In addition, Dietrich pointed out that gold prices have risen by about 20% in the past year, reaching a historic high. He attributed this to institutional investors buying safe-haven assets, and believes that this is because they expect "the stock market to experience a significant correction or crash due to the overvaluation and economic slowdown."

In terms of the economy, Dietrich believes that decades of excessive fiscal spending and artificially low interest rates have prevented economic recessions.

He predicts that in order to curb stubborn inflation, interest rates will remain high in the coming years, and governments will be forced to raise taxes to address ballooning budget deficits, thereby lowering asset prices of stocks and property and causing economic recession.

"It seems that nobody is paying attention to the fact that the economy is cooling down, and economic risks are everywhere. I still think that the economy is likely to experience a mild recession this year."

Dietrich pointed out that during an economic recession, the S&P 500 index usually falls by about 36%. As the index still needs to fall 12% from its current level of about 5450 points to return to the 200-day moving average line, he warned that the index could plummet by 48% to about 2800 points - the lowest level since the outbreak of the COVID-19 pandemic in the spring of 2020.

The Wall Street veteran is one of several top forecasters who predicted heavy losses in the U.S. stock market and an economic recession in the country. But it should be noted that Dietrich's persistent warnings in recent months have not materialized, and neither the market nor the economy has fallen into serious trouble.