Potential Economic Recession in 2026 Raises Risk of 20% Drop in S&P 500, Stifel Warns
Stifel Investment Bank has warned of a potential economic recession in the United States in 2026, cautioning investors to prepare for a possible rapid decline of up to 20% in the benchmark S&P 500 index, according to a note sent to clients.
At the same time, the bank noted that if the US economy continues to perform well in 2026, the S&P 500 could instead post gains of around 9%, highlighting the wide divergence between potential market outcomes.
Barry Bannister, Stifel’s Chief US Equity Strategist, said the Federal Reserve has begun easing its monetary policy stance, but stressed that the risk of a recession accompanied by a sharp 20% correction in the S&P 500 should not be underestimated. His comments were reported by Business Insider on Saturday, November 13.
A recession is not Stifel’s base-case scenario for next year, nor is it the primary outlook of other major banks. The Federal Reserve has also raised its economic growth forecasts for 2026. Nevertheless, Stifel assigns a 25% probability to an economic contraction.
Despite this, Bannister believes market conditions could quickly deteriorate if the economic backdrop weakens, creating an environment conducive to a sharp equity sell-off.
He pointed first to growing fragility in the US labor market, citing rising unemployment rates, increased layoffs, and a slowdown in new job creation. Should labor market conditions deteriorate further, consumers may begin to rein in spending, a development that would pose a significant threat to an economy in which consumer spending accounts for approximately 68% of gross domestic product.
Compounding these risks are historically elevated equity valuations. Stifel noted that the average decline in stock prices during recessions since World War II has been around 20%, with the median drop reaching 23%.
“Price-to-earnings multiples do not matter,” Bannister said, “until they suddenly become the only thing that matters, at which point the S&P 500 is expensive.”
In the event of a bear market, Bannister expects the most speculative assets to sell off first, followed by a broader market decline. He pointed to a basket of seven highly volatile stocks that he tracks as a gauge of speculative appetite - including Palantir, Strategy, and GameStop - which has already recorded a notable decline over the past few months.
Bannister also highlighted two warning charts in his note that he described as particularly concerning. One illustrates the accelerating pace of the rise in the unemployment rate, while the other tracks the equity risk premium for the S&P 500 - the expected return on stocks, based on current valuations, relative to the risk-free yield on US Treasury bonds.
According to Stifel, the equity risk premium is approaching levels last seen during the dot-com bubble of the late 1990s and early 2000s, reinforcing concerns about market vulnerability.
While Bannister reiterated that the bank’s base-case scenario still calls for positive returns for the S&P 500 in 2026, he recommended that investors hedge against downside risks by increasing exposure to defensive equities.
He pointed to funds such as the Consumer Staples Select Sector SPDR Fund, the Invesco S&P 500 Low Volatility ETF, the JPMorgan Equity Premium Income ETF, and the iMGP DBi Managed Futures Strategy ETF as vehicles that provide exposure to traditionally defensive assets.