The gloomy forecast made by a famous economist: Nothing can stop the recession in the USA. What's next for investors?

Falling consumer spending and a stuck housing market are pushing the U.S. economy closer to a recession, economist Gary Shilling says. He warns that the US stock market could experience a massive decline by the end of the year, according to Business Insider.

Almost nothing can stop a US recession in 2026, economist and former Merrill Lynch employee Gary Shilling said in an interview with Business Insider. He expects a strong correction in stocks as prices have reached very high levels.

Shilling also estimates that the S&P 500 index, which measures the performance of the 500 largest US companies, could drop as much as 30% by the end of the year.

He says the only things that could prevent a recession right now would be a series of fiscal stimulus or maintaining the strength of the American consumer, both of which are unlikely in his view.

Warnings from the US economy

Shilling pointed to several signals that suggest the US economy is close to recession.

First, the housing market remains stuck as interest rates are expected to remain high. Home buying activity has slowed after rate hikes in recent weeks.

At the same time, the investments of private companies have decreased in recent years. While AI spending is on the rise, overall investment grew by just 3.9% at the end of last year.

Another important factor is population consumption, which supports approximately two-thirds of economic growth. Shilling says spending will fall because of financial pressures on citizens. Disposable income rose just 0.4% in March and the savings rate fell to 3.6%.

Americans are feeling the cumulative effects of price hikes started in the pandemic and recent inflation. Data from the Bureau of Labor Statistics show that energy prices rose 12.5% ​​in March compared to the same period last year. This is the biggest increase since 2022 and was driven by rising oil prices.

During the same period, disposable income growth slowed to an annual pace of 0.4%. This is the lowest level in three years. At the same time, the population savings rate fell to 3.6%, reaching the minimum since 2022.

“The situation is really precarious in terms of income and people's willingness to spend,” Shilling said.

Stunning ratings

Shilling said share prices have risen to high levels in recent years. He pointed to three indicators that show stocks are overvalued.

The first is the inflation-adjusted price-to-earnings ratio of the S&P 500, called the Shiller CAPE ratio. It is at its highest level since before the collapse of the dot-com bubble. The other two indicators are the price-to-sales ratio and the price-to-book ratio, both of which are at record highs.

“Stocks are very expensive and a major correction is likely to occur sometime in the relatively near future,” Shilling said. He estimates the timing of this correction to be the end of 2026. “A 20% or 30% drop is not a big deal historically. So I would say that's probably going to happen.”

Shilling noted that it's unclear what could trigger the stock's decline. Such declines are usually caused by excesses in the market. However, he does not see the development of artificial intelligence as necessarily a sign of excess.

“I've kind of made a career out of looking for those hidden flaws, and right now I don't see anything that obviously points to a massive sell-off, but that doesn't mean it doesn't exist,” he said.

The economist warned investors of a recession and a decline in stocks over the past four years. Last year, he argued that the decline could be triggered by speculation in the financial markets, pointing to transactions in cryptocurrencies and those in the artificial intelligence sector.

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