The warning has just come down, and it hasn't gone unnoticed on the New York desks. Larry McDonald, former trader at Lehman Brothers and renowned strategist, predicts that the S&P 500 could tumble by 35% within the year. 🚨 When a man who lived through the 2008 crisis from the inside comes out with this kind of figure, it's not media noise - it's a signal worth paying attention to.
🔍 What's going on?
McDonald, who made his name documenting Lehman's collapse in several landmark books, warns of a US market that is silently piling up risk. His analysis is based on two clashing fundamentals: interest rates that remain stubbornly high, and a wave of investment in AI that could disappoint in the face of the insane expectations built into current valuations.
His scenario can be summed up in one sentence: current S&P 500 valuation multiples no longer jibe with an economic reality where borrowing costs are punishing companies and the productivity promised by AI is slow to materialize in income statements. The currency markets, for their part, are already incorporating some of this nervousness. EUR/USD is hovering around 1.1517, GBP/USD at 1.3193, and USD/JPY around 159.70 - levels that show that carry trades remain under stress and capital is still looking for direction.
💡 Why it matters?
For anyone with capital exposed to US indices, the alert deserves more than a shrug. A 35% retracement is no trivial correction - it's the kind of move that liquidates poorly hedged portfolios and turns years of gains to dust in the space of a few months. It is also, historically, the type of phase that creates the best buying opportunities for those who have retained cash and discipline.
The mechanism is simple to understand. When rates remain high, the cost of capital rises, the margins of indebted companies contract, and investors begin to demand a higher risk premium to remain invested in equities. If, on top of this, the IA narrative - which has underpinned much of the indices' performance over the past two years - begins to falter, the whole speculative edifice is weakened. And a collapse of the S&P 500 would not remain isolated: it would lead to a strengthening of the dollar as a safe haven, which would in turn weigh on emerging currencies and European exporters.
📊 Our view
We're rather cautious in the short term on the S&P 500, without buying into the 35% doomsday scenario. McDonald isn't throwing out gratuitous FUD - his reasoning is sound on the merits, and high rates do erode valuations mechanically. But a crash of this magnitude would require a real panic catalyst: a major geopolitical shock, a bank failure, or a sudden reversal in the results of tech giants. It's possible, but it's not the central scenario.
What seems more likely is a 15-20% retracement over the next six months, enough to awaken memories of 2022 but not enough to break everything. For long positions in US indices, this is typically the time to tighten stops, avoid leverage, and keep cash on hand. For those who are neutral or on hold, it's better to let the correction take place before coming back, rather than trying to catch the falling knife. And on currencies, the USD remains to be watched as a potential safe haven if things really get out of hand.
✅ Things to remember
Larry McDonald (ex-Lehman) predicts a 35% crash of the S&P 500 over the year
Two main factors: high rates weighing on valuations and potential disillusionment over AI
EUR/USD at 1.1517, GBP/USD at 1.3193, USD/JPY around 159.70
Our reading: 15-20% retracement likely, 35% crash would require a real black swan
Strategy: tight stops on S&P longs, cash on hold, watching the dollar as a safe haven
And you, do you take McDonald seriously and start lightening your US positions, or do you think he's just a permabear crying wolf once more?
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