Market prophet Gary Shilling expects S&P 500 returns to slump — and warns a recession could stretch into 2025

• Investors should expect lower stock market returns in the future, Gary Shilling says.

• The legendary forecaster cited slower economic growth, steep valuations, and fading speculation.

• Merrill Lynch’s first chief economist said a recession appears likely and could extend into 2025.

Investors in the stock market face decades of disappointment, and a recession threatens to strike this year and extend into 2025, a legendary market forecaster warned.

The S&P 500 has gained an average of 12.3% a year including dividends since bottoming in July 1982, but it’s likely to post lower returns going forward, Gary Shilling wrote in his Insight newsletter for February.

Merrill Lynch’s first chief economist, who launched his own consultancy and advisory firm in 1978, is known for correctly calling several major market shifts over the past 50 years.

In his latest outlook, Shilling predicted stocks would be held back by slower real economic growth, reflecting modest labor-force and productivity gains and an ageing population that saves more and spends less. The president of A. Gary Shilling & Company also suggested that slower inflation would weigh on nominal increases in stock prices.

Moreover, Shilling underscored that equities are aggressively valued relative to corporate profits, with the S&P 500’s price-to-earnings ratio for the last 12 months at 24.8 — well above the long-term average of 17.3. He also called out recklessness and silliness in markets, and predicted that would dissipate over time.

“A key reason that stock prices are elevated and likely to be subdued in future years is the demise of widespread speculation,” he said. “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.”

Shilling accused bitcoin and other cryptocurrencies of distracting investors and sapping productivity. He said the post-pandemic drop in the CBOE Volatility Index,…