Brace for a swift 20% drop in the S&P 500 if recession strikes in 2026, Wall Street forecaster says

Core Viewpoint - Stifel projects a 9% upside for the S&P 500 in 2026 under stable economic conditions, but warns of a potential 20% decline if a recession occurs [1][7]. Economic Outlook - The Federal Reserve has increased its growth forecast for 2026, with Stifel assigning a 25% probability of a recession occurring [2]. - The labor market shows signs of weakness, with rising unemployment and layoffs, which could negatively impact consumer spending that constitutes 68% of GDP [3]. Market Conditions - Stock valuations are historically high, with the median pullback during recessionary periods since World War II averaging 20% [4]. - The S&P 500's equity risk premium is nearing levels seen during the dot-com bubble, indicating potential overvaluation [8]. Investment Strategy - Stifel recommends building hedge positions with defensive stocks to mitigate risks associated with a potential bear market [9]. - Speculative assets have already seen significant declines, suggesting a broader market downturn could follow [5].