Consider what makes a depression. It starts with a period of euphoria about the outlook for the economy and the future earnings of new companies. The euphoria finally becomes unsustainable, and the stock prices of the new companies collapse. Large wealth losses replace large expected wealth gains. Consumption growth slows, then turns negative, and stock prices of more companies fall because weaker demand erases those companies' pricing power and, with it, their prospective profits.
Demand falls further, and deflation sets in.
The decline in stocks becomes the major transmission mechanism running from financial markets to the real economy. That is because, after a bubble, earnings fall faster than any central bank can, or will, cut interest rates, and when earnings or, more ominously, expected earnings fall faster than interest rates, then stock prices plummet. Earnings expectations for Nasdaq companies have already fallen by more than 75 percent in many cases. By May, most observers expect the Federal Reserve will have cut interest rates by 2 percentage points, from 6.5 to 4.5 percent, or by about 30 percent. That would be a large move by historical standards, but not enough to stabilize equity prices.