S&P 500 faces a 40% slump

The average strategist's forecast is for a 27% rise in the S&P 500 by the end of the year. But that's far too optimistic. This isn't just a nasty recession, it's a deflationary credit-bubble collapse.

Even though last year proved disastrous, most US strategists are undaunted. The average forecast in a Bloomberg survey last week foresees a 27% rise in the S&P 500 by the end of the year. But the index has made a shaky start. It has slid by around 6% amid turmoil in the banking sector, the deteriorating economic outlook America looks set for the worst recession since the war and constant earnings disappointments.

Investors were hoping that fourth-quarter results would bring at least "a glimmer of light at the end of the tunnel", says Eric Savitz in Barron's. "It turns out that no one can even find the damned tunnel." Last March, analysts were expecting a 55% rise in S&P 500 profits for the fourth quarter. About a fifth of the results are in, and so far earnings are down by 47%, undershooting the 32% fall currently expected.

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