Wharton professor Jeremy Siegel sees the Dow surging 2,000 points once the Fed pivots to cutting rates - and says the US can still escape a recession

• US stocks look cheap, and could soar once the Fed starts cutting interest rates, Jeremy Siegel said.
• He said the US can escape recession if the Fed pivots from raising rates to lowering them by summer.

US stocks are trading at bargain prices, and the Federal Reserve can avoid a recession if it shifts from hiking interest rates to cutting them by next summer, Jeremy Siegel has said.

"Even if there's going to be a recession or a slowdown, these valuations are very, very good in the market in a long-term sense," the Wharton finance professor and author of "Stocks for the Long Run" said in a recent Bloomberg interview.

"If the Fed does pivot, within a couple days we may see a couple thousand points added to the Dow," he added.

The Dow Jones Industrial Average has dropped about 10% this year to around 33,000 points. Siegel's call suggests it could surge by 6% to nearly 35,000 points as soon as the Fed starts loosening its monetary policy.

The US central bank has hiked rates from almost zero in March to a range of 3.75% to 4% today, in response to inflation soaring to 40-year highs this year. Fed Chair Jerome Powell recently warned he's seeing little evidence that price pressures are fading, and he has signaled rates could peak above 5%.

"The market is convinced that he will see the light and he will pivot soon and realize that rates are high enough and inflation is coming down quite dramatically," Siegel said.

If the Fed pauses its hikes well before rates reach 5.5%, and reverses course within the next eight months, asset prices could jump and the US economy might skirt a recession, he argued.

"We could really have a soft landing and a great market next year," he said.

Siegel detailed why he believes the inflation threat is fading. Forward-looking price indices suggest core inflation has dropped to nearly zero, he said. House prices, commodity costs, and cargo and freight rates have all declined as well, he noted.

The veteran academic also suggested the current wave of Big Tech layoffs could spread to other industries next year, easing upward pressure on wages.

Moreover, he pointed to an unprecedented decline in the US money supply over the past six months, and the dollar's surge this year, as further signs that economic conditions are tightening.

The Fed initially underestimated inflation, he said, but now it's going overboard in fighting it and risking a painful and unnecessary recession.

"They were too slow in 2020 and 2021 and then suddenly they got religion," Siegel said. "They've gone too much in the other direction."

Siegel has previously predicted stocks could jump 20% over the next two years, and warned the housing market might suffer a historic collapse if the Fed fails to cut rates in the coming months.

Read more: Why the Fed will likely cause an unnecessary recession even though rampant inflation is fading away, according to the chief global strategist for JPMorgan's investing arm