Stocks Could See Fast 20% Drop If Recession Hits in 2026, Stifel Says

Core Viewpoint - Stifel projects a 9% upside for the S&P 500 in 2026 if the US economy remains stable, but warns of a potential 20% decline in the event of a recession [1][2] Economic Outlook - A recession is not the base case for Stifel or other major banks, with a 25% chance assigned to a downturn occurring next year [2] - The Federal Reserve has increased its growth forecast for 2026, indicating a more optimistic economic outlook [2] Labor Market Concerns - The labor market shows signs of instability, with rising unemployment and layoffs, which could lead to reduced consumer spending [3] - Consumer spending accounts for 68% of GDP, making its decline a significant concern for economic health [3] Stock Valuation Risks - Current stock valuations are historically high, with median pullbacks during recessions averaging 20% and average drops at 23% since World War II [4] - The S&P 500 is considered expensive, and P/E ratios may become critical in a downturn [4] Speculative Assets and Market Behavior - In the event of a bear market, speculative assets are expected to decline first, followed by the broader market [5] - A basket of seven highly-volatile stocks has already seen significant declines, indicating a shift in market sentiment [5] Defensive Investment Recommendations - Despite a positive base case for the S&P 500, Stifel recommends building hedge positions with defensive stocks [6] - Suggested funds for exposure to defensive assets include Consumer Staples Select Sector SPDR Fund (XLP), Invesco S&P 500 Low Volatility ETF (SPLV), JPMorgan Equity Premium Income ETF (JEPI), and iMGP DBi Managed Futures Strategy ETF (DBMF) [6]