Stock market crash alert: The S&P 500 could collapse by 48%

Despite the gains so far this year, one analyst believes that a stock market crash could be imminent. In fact, Paul Dietrich, chief investment strategist at B. Riley, believes that the S&P500 could fall by as much as 48% if the bubble bursts and a recession breaks out in the country.

According to Dietrich, the market is currently massively overvalued. He predicts that the US economy will slide into a devastating recession if taxes rise and inflation and interest rates remain high.

“I believe the coming recession will lead to a sharper decline in stock markets than we saw in 2000 and 2008,” Dietrich said in his June monthly commentary.

Dietrich believes that the S&P price-to-earnings (P/E) ratio and the inflation-adjusted Shiller P/E ratio – both of which are at “multi-decade highs” – suggest that stocks are currently highly overvalued, potentially indicating a developing bubble. In fact, Dietrich compared speculation about artificial intelligence (AI) with the dot-com bubble of the early 2000s.

Dietrich focuses on indicators of a stock market crash

As Business Insider In his reports, Dietrich also pointed to the level of the Buffett Indicator, which recently hit a two-year high of 184%, another signal that the market is overvalued. The Buffett Indicator uses the combined market capitalization of all actively traded U.S. stocks divided by the most recent quarterly estimate of gross domestic product (GDP). This helps gauge the value of the stock market relative to the size of the economy.

Dietrich believes the economy and market have been artificially propped up by interest rates near 0% for much of the pandemic. He argues that higher interest rates and tax increases by the government to address a rapidly rising budget deficit are a recipe for an economic downturn.

“Nobody seems to notice that the economy is slowing down and there are risks to the economy everywhere,” Dietrich noted. “I still believe that there is a high probability that the economy will slide into a mild recession this year.”

At the time of publication, Shrey Dua did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com Publishing guidelines.