jeremy siegel
Jeremy Siegel.
  • A 50-basis-point hike this week could send the Dow down 1,000 points, Wharton's Jeremy Siegel said.
  • If the Fed ends its rate hikes and productivity improves, the S&P 500 could jump 10%, Siegel said.
  • The veteran professor flagged signs of US economic weakness and sounded the recession alarm.

Stocks could tumble if the Federal Reserve surprises investors with a 50-basis-point hike to interest rates on Wednesday, instead of raising them by the expected 25 points, Jeremy Siegel has warned.

"There will be tremendous selling pressure for the risk markets, and we could easily see a 1,000-point drop in the Dow immediately," the Wharton finance professor said in his WisdomTree commentary this week.

That would represent a 3% decline from the Dow Jones Industrial Average's level of about 33,700 points as of Monday's close.

On the other hand, the author of "Stocks for the Long Run" has suggested the S&P 500 could surge by over 10% to around 4,500 points if the Fed promptly pivots to cutting rates and worker productivity improves. He  issued the forecast during the latest episode of the "Behind the Markets" podcast.

US inflation surged to a 40-year high of 9.1% last June, spurring the Fed to hike rates from nearly zero in March to over 4% by the end of December. Higher interest rates deter spending and borrowing, which can relieve inflationary pressure, but can also weigh on asset prices and economic growth.

Siegel has repeatedly underscored the critical importance of Fed policy to the fate of the US economy and stock market. A 50-point hike would be a "disaster for the markets" and would widen the gap between the Fed funds rate and the 10-year Treasury yield, which would "certainly be a harbinger of a recession going forward," he said on the podcast.

The veteran academic outlined what investors want to see from the central bank, and why a delayed shift to cutting rates would be dangerous.

"They want the Fed to 'get it' and recognize that inflation basically has been stopped," Siegel said. "If the Fed doesn't pivot very soon, it seems to be very hard to avoid a recession in the second half of 2023 and early 2024."

Siegel, in his commentary, laid out why he believes the US economy is already under the cosh. He flagged evidence of weakening domestic demand and consumption, and argued the recent wave of layoffs is yet to be reflected in unemployment data. He also pointed out that money supply, a key driver of inflation, registered its largest annual contraction since the Great Depression last year.

Moreover, the Wharton professor explained why he's optimistic about stocks this year. If companies get rid of their worst workers, that could boost productivity, alleviate cost inflation, and boost their profits. Larger corporate earnings support higher stock prices, he noted.

Read more: Why US home prices could fall 20% this year — and which cities and regions will see the largest declines, according to KPMG

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