Bear markets and recessions

Some history of bear markets and recessions from Goldman.


A recession is not inevitable, but clients constantly ask what to expect from equities in the event of a recession. Our economists estimate a 35% probability that the US economy will enter a recession during the next two years and believe the yield curve is pricing a similar likelihood of a contraction. Rotations within the US equity market indicate that investors are pricing elevated odds of a downturn compared with the strength of recent economic data. Additionally, the dividend futures market implies S&P 500 dividends will decline by nearly 5% in 2023. During the last 60 years, S&P 500 dividends have not declined outside of a recession.

In this report, we discuss how S&P 500 price, earnings, valuations, and sector and factor performance have fared in past recessions.

INDEX: Across 12 recessions since World War II, the S&P 500 index has contracted from peak to trough by a median of 24%. A decline of this magnitude from the S&P 500 peak of nearly 4800 in January 2022 would bring the S&P 500 to approximately 3650 (11% below current levels). The average decline of 30% would reduce the S&P 500 to 3360 (-18% from today).

EARNINGS: Since 1948, S&P 500 earnings have dropped from peak to trough around recessions by a median of 13%. EPS have recovered by a median of 17% four quarters after troughing.

VALUATION: The S&P 500 forward P/E multiple has contracted by a median of 21% between its pre-recession peak and its eventual trough. During the typical recession since 1980, the index P/E multiple peaked 8 months in advance of the onset of a recession and declined by 15% between its pre-recession peak and the beginning of the recession.

SECTORS: During the 12 months before a recession, defensive sectors and “quality” factors have generally outperformed. Across 5 recessions since 1981, the average experience saw Energy, Consumer Staples, Health Care, and Utilities outperform the index.

Houses and Holes

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