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Capital Economics's 30% drawdown needs the S&P multiple back at 13.7 times
James Reilly's September 10 report has the S&P 500 cracking next year and eventually falling at least 30% from its high, while Morgan Stanley Wealth Management's committee still carries a year-end target of 8,000.
The Investor · Invest desk
What happened
- Capital Economics's September 10 report, written by senior markets economist James Reilly, screened eight categories of market indicators and found most at or near levels that have historically preceded major peaks.
- The London firm now forecasts that the S&P 500 starts cracking next year and eventually falls at least 30% from its high, which it counts as one of the seven worst crashes in the past century.
- The Federal Reserve is expected on Wednesday to raise rates for the first time since July 2023, the same move that effectively ended the last comparable technology boom 26 years ago.
- Microsoft's market value rose $450 billion on July 30, and the following day Apple's fell $360 billion, while Amazon gained $388 billion and Meta dropped $102 billion the day before.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- contradiction Morgan Stanley's mid-2027 target and Capital Economics's at-least-30% fall describe the same month, so no single allocation honours both forecasts, and one of the two houses will be wrong on a dated public record.
- decision An investor who takes the drawdown call seriously has to pick which leg to hedge, because a multiple compressing again and forward estimates breaking call for different positions and different timing.
- constraint If Morgan Stanley's committee is right that the build-out is "mostly rate-insensitive," Wednesday's decision reprices discount rates and settles very little about hyperscaler capital spending.
- exposure With Lamont's dispersion index at its third-highest reading in more than 2,850 sessions, a calm index level no longer protects a concentrated book from what single names do inside one day.
Take both forecasts at their numbers. A 30% fall with forward earnings flat leaves the S&P 500 at about 13.7 times those earnings, since 19.5 times less 30% is 13.65 [4][1]. So Capital Economics is calling one of two variables: the multiple compresses by another third, or forward earnings themselves break [2].
This year the two moved against each other. The forward multiple went from 22.5 times in January to about 19.5 times now, a compression of roughly 13%, and earnings growth above 30% year on year covered it [4][2]; on those two figures, 30% more earnings on a multiple 13% lower gives a price about 13% higher [3]. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, told clients they were entering "Wall Street's proverbial silly season" [11]. Rising rates, oil-market stress and policy noise are real, she wrote, but "markets appear to be pricing them in clear-eyed fashion" [12].
Her committee's targets are 8,000 for year-end and 8,300 for mid-2027 [3]. Thirty percent off 8,300 is 5,810, which leaves the two houses about 2,500 index points apart on the same month [4][5]. Fortune's account of the September 10 report states the fall as at least 30% from the index's high without giving a level for that high [18].
UBS expects Wednesday's vote to split 10-2, with Governors Christopher Waller and Michelle Bowman dissenting in favour of holding steady [6]. Chair Kevin Warsh's August 28 Jackson Hole speech contained what UBS counted as 20 separate hawkish observations [8]. "I would be hard pressed to describe broad financial conditions as restrictive," he said [7]. UBS expects him to repeat one line almost verbatim on Wednesday: "There is one signal nobody can miss: The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank." [9]
Owen Lamont, a behavioral economist and portfolio manager at Acadian Asset Management, wrote that Microsoft's one-day gain was equivalent to "1.04 Houstons" in assessed property value, and that Apple's loss matched 3.6 Hurricane Sandys [16]. He posted the comparisons on his Owenomics blog under the heading "Crazy days in the stock market" [19].
In my view the two forecasts disagree about one line, not about whether the AI trade is dear: both are priced off hyperscaler earnings, and only Morgan Stanley's committee thinks the growth holds. The stronger version of the bear case is not the multiple at all but the denominator, where estimates fall first and the drawdown arrives without the price-to-earnings ratio ever printing 13.7 times [1]. The forecast fails if earnings growth stays above 30% and the multiple holds near 19.5, because the index then keeps setting highs and there is no peak to fall 30% from [4][2].
What to watch
- Whether Wednesday's vote splits 10-2 as UBS expects, and whether Warsh repeats the 65-month inflation line at the press conference.
- The next hyperscaler earnings season: above-30% year-over-year growth is the leg Capital Economics's 30% call needs to break.
- Whether the forward multiple resumes compressing below 19.5 without an earnings miss to explain it.