The economy appears more resilient than recession-bound, but stocks could see a notable slide if major retailers soften their financial guidance, Wharton School and WisdomTree economist Jeremy Siegel says.
"Bottom line for positioning: the consumer is the fulcrum," Siegel wrote in his weekly commentary published Monday. "If big-box guidance softens under affordability pressure, a textbook 5–10% correction is in play. I’d be a buyer into that magnitude of weakness, because the macro still argues for resilience rather than recession."
Siegel doesn't see last week's pullback as the start of a bear market.
"The Dow just printed fresh highs, breadth rotated toward quality and defensive stocks, and the weakness centered on AI-linked capex stories repricing risks associated with the capex buildouts," he wrote.
Consensus among financial analysts at a recent gathering favored a 2% to 4% equity risk premium over bonds in the the next decade, comparable to its historical average, according to Siegel.
"With TIPS real yields near ~2%," he added, "that implies a 4–6% long-run real return for equities — somewhat lower than the 20th-century average but still firmly pro-equity."
Investors shouldn't expect further price-to-earnings multiple expansion to fuel growth stocks' dominance, Siegel said.
The roughly 23 forward earnings P/E for AI companies can hold up if earnings compound, but if they underdeliver, "P/E deflation becomes a second hit," he wrote, arguing for "selective quality-value tilts, cash-flow discipline, and owning stocks that benefit from curve normalization rather than paying ever-higher prices for growth stocks."
International stocks are appealing, with mid-teens P/E ratios compared with low 20s in the United States, according to Siegel, who said that U.S. leadership at the index level is intact.
Meanwhile, the Federal Reserve's hawkish tone is misguided and contributing to risk-off sentiment, Siegel said. Regulated insurance industries and energy prices are driving inflation higher and don't respond to tighter demand resulting from elevated interest rates, he explained.
He puts odds for a December rate cut about even, depending on upcoming data.
"Nonetheless, I believe that the Fed will pivot to a clearer easing bias into Q1 if incoming activity and prices continue to cool," he wrote.
A material food tariffs rollback is a notable tailwind, Siegel noted.
"If this broadens beyond food," he wrote, "it dampens goods inflation and reduces political incentive for renewed tariff escalation; that is constructive for real incomes and margins."
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