Brace for stocks to crash 25% - and a recession to strike by spring, top economist David Rosenberg warns

• A recession will hit by the spring, and the S&P 500 will crash by 25% or more, David Rosenberg says.
• American consumers have propped up the economy but they're on the brink of tapping out, he says.

The US economy will crater by spring, causing the S&P 500 to crash by 25% or more, David Rosenberg has predicted.

"If this recession hasn't happened by the first quarter of next year," he recently said on the WTFinance podcast, "I will wipe the egg off my face, and I'll write a report saying, 'I was wrong, the business cycle has been repealed after all."

The Federal Reserve has hiked interest rates from nearly zero to north of 5% since last spring in an effort to curb historic inflation. Short-term Treasuries are also paying larger yields than long-term government bonds, signaling Wall Street expects an economic downturn to spur the Fed to cut rates in the coming years. The economy has never gone through a Fed tightening cycle where the yield curve was inverted and not suffered a recession, Rosenberg said.

The Rosenberg Research president described the American consumer as the "Energizer bunny," because households have kept spending relentlessly for the past couple of years. However, he warned their stimulus-juiced savings are close to running out, student-debt repayments resumed this month, and there are mounting signs of consumer stress such as rising delinquency on credit-card payments.

"I think the batteries are going to run out," Rosenberg said. "A consumer recession is inescapable, it's only going to be a question of how bad, not whether."

The former chief North American economist at Merrill Lynch predicted unemployment would tick upward and wage growth would slow as the full impacts of the Fed's rate hikes are felt. The deteriorating economic picture isn't priced into assets currently, meaning investors could be in for a "real rude surprise" within months, he said.

Indeed, Rosenberg pointed out that the stock market typically plunges 30% in a recession. He suggested the S&P 500 could drop by about 25% from its current level to around 3,400 points, or roughly 30% from its peak of over 4,800 points at the start of 2021.

Rosenberg also shrugged off the recent increase in home prices as evidence of a "very depressed" housing market, not a healthy one.

Prospective buyers are balking at paying near-record prices and taking on mortgages when interest rates have more than doubled since the start of last year. Would-be sellers are also refraining from listing their homes, as they don't want to give up cheap mortgage rates they've locked in, and pay through the nose for their next place.

"We've created a really sclerotic housing market, and it's a very weird housing market," Rosenberg said, adding that prices have only climbed because supply has dropped even more than demand has.

The veteran economist also drew a parallel between the current market, where investors are assuming next year will be as rosy as this year, and the period before the housing bubble burst and triggered a global financial crisis in late 2007.

"Anybody who was willing to superimpose or extrapolate 2007 into 2008 summarily got their heads chopped off," he said. "I think we might relive that."