A highly optimistic strategist who sees US stocks soaring more than 25% before year's end also believes there's an unusually high risk of the worst market crash since 2008.
That may sound like an April Fool's joke, but James Demmert of Main Street Research believes it's no laughing matter.
The veteran investment chief recently told Business Insider that investors are overly fearful since the market's fundamentals — namely earnings and economic growth — are still strong. And while sentiment is weakening, he's confident that robust first-quarter earnings results will dispel recession concerns. President Donald Trump's tariffs are more bark than bite, in his view.
When asked what would make one of the market's biggest bulls bearish, Demmert didn't hesitate. It's not tariffs that keep him up at night, but the credit quality of the US government.
"A real downgrade there — we think that's a 2008-type of bear market," Demmert said of the US credit quality. "You've got a real problem on your hands."
If history were to repeat itself, the S&P 500 could get cut in half, like it did from its mid-2007 peak to its early-2009 trough.
'We're heading in that direction'
It's no secret that the US government has run up the public debt like there's no tomorrow.
The public collectively owes $36.6 trillion and counting — a figure that has ballooned from under $6 trillion at the turn of the century. Both Democratic and Republican administrations have run up the count, and pundits say there's little reason to think that either party has a way to reverse it.
Legendary investor Ray Dalio has warned that the US financial system is at risk of a proverbial "heart attack" as its debt interest payments compound. The billionaire has said US Treasurys could tank in value unless politicians take drastic steps to right-size the debt. Demmert agrees.
"Given the current trend of the US debt issues, it's very likely in the next year or two," Demmert said of the US credit rating getting downgraded again.
The investment chief added this ominous warning: "Unless we solve or slow down the rate of our budget deficit, I think we're heading in that direction."
It's worth noting that the US has shaken off credit downgrades before. Credit rating agency Fitch lowered its rating on US debt to AA+ from AAA in August 2023, but while the S&P 500 sold off, it turned out to be a minor blip. And S&P caused a stir in 2011 by downgrading US debt to AA+, though that certainly hasn't stopped stocks from surging for much of the last decade and a half.
However, Demmert said it would be naive to believe that the US can spend lavishly and indefinitely without any consequences.
"Somebody's got to get in there and reduce our government spending," Demmert said. "It's the only way we're going to get out of that pickle."
DOGE cuts may not cut it
Enter the Department of Government Efficiency, or DOGE. The new institution, which effectively is run by Elon Musk, is designed to lower the US debt burden by slashing government spending.
This is a worthy and admirable aim, in Demmert's view.
"The goal of a lot of this slimming down Washington is to reduce that risk," Demmert said. "The medicine doesn't taste good, but what it does is, it makes the patient get up off the ground. Whether this is the right way to do it or not, I'm not here to say."
Although Demmert originally didn't want to opine DOGE, he added more color when pressed.
"It's a good idea," Demmert said. "I think it's like a bull in a china shop. It's really aggressively executed and doesn't look like it's been well thought through."
Instead of immediately gutting entire departments, Demmert wishes Musk and company had taken time to get a lay of the land and see where the waste really was. By opting for a shoot-first-aim-second approach, DOGE may have violated the rule of Chesterton's Fence: don't take down a seemingly random fence until you understand why it was built in the first place.
So despite its best intentions, DOGE might not solve the crisis that Demmert worries is looming.
"It's unsettling equity markets for good reason," Demmert said. "The idea is good. The execution is poor."
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