News: The S&P 500 will crash 30% by December as spending slumps, profits shrink, and banking problems mount, markets guru warns

Larry McDonald, the founder of "The Bear Traps Report," has issued a warning that the S&P 500 could crash by almost 30% by December. McDonald cites three main factors: declining corporate profits, reduced government spending, and vulnerabilities in the financial system, which he believes will have a significant negative impact on stocks.

In an interview with Insider, McDonald predicts that the S&P 500, currently at around 4,200 points, could drop to 3,000 points by the end of the year, representing its lowest level since June 2020. He had previously made a similar prediction in March, suggesting a 30% market decline within 60 days. Although the S&P 500 has since gained 5% and is up nearly 10% this year, McDonald argues that his forecast wasn't entirely inaccurate.

While acknowledging that some blue-chip stocks have experienced a decline, McDonald observes that investors have redirected their funds into other stocks they perceive as more resilient to a recession. Companies such as Hershey's, McDonald's, Dick's Sporting Goods, Nvidia, and Microsoft have been favored by investors seeking alternative options.

Approximately 20% of the S&P 500 constituents have seen a decline of at least 10% this year, and nearly half of the index is in negative territory, according to SlickCharts data. This implies that the index's overall gains since January have been driven by a relatively small number of stocks.

McDonald draws parallels between the current market conditions and the circumstances preceding the collapse of Lehman Brothers in 2008, which triggered the Global Financial Crisis. He identifies several indicators signaling potential trouble ahead for investors and the US economy, referring to it as a "slow-moving trainwreck."

Factors contributing to McDonald's projected 30% decline in stocks over the next seven months include concerns about the commercial real estate portfolio of MetLife due to higher interest rates and tighter credit. He also mentions the potential impact of reduced government spending and increased pressure on asset prices and the economy resulting from historic inflation and higher interest rates.

In light of the anticipated downturn, McDonald advises investors to avoid mainstream US stock indices, which he believes are heavily exposed to high-flying tech stocks. Instead, he suggests focusing on undervalued, cyclical stocks in sectors such as energy, as well as investing in tangible assets like gold, silver, and platinum.