One of Wall Street’s top strategists sees stocks falling 10% due to a ‘moderate form of stagflation’

In a note on Tuesday, Stifel chief equity strategist Barry Bannister said he expects the S&P 500 to drop roughly 10% to 4,750 by the end of the summer. The Wall Street veteran – who argued in 2023 that stock market returns could be flat for a decade when adjusted for inflation – cited three main reasons for his bearish outlook.

The first, perhaps surprisingly, was “sticky” inflation. Bannister has been warning for months now that he believes the Federal Reserve has already “harvested” all the disinflation that usually comes with a recession during a five-quarter “pseudo-recession” that ended in the second quarter of 2023. In May, he even argued that this means that Fed officials’ goal of returning inflation to 2% is nothing more than a pipe dream.

Bannister fears that strong utility spending along with rising health care, financial and insurance costs will lead to continued inflation in that key sector of the economy. Throw in more housing inflation than previously predicted, a slowing rate of productivity growth and continued wage growth, and you have a recipe for a “moderate form of stagflation,” he says.

That low-growth, moderate-inflation outlook could lower the S&P 500’s price-to-earnings ratio — a metric used to evaluate the index — by 500 points, the strategist warned, as investors count on lower potential earnings growth and higher costs.

After stocks rallied this year, the S&P 500 trades at just over 23 times earnings, according to Wall Street Journal. This is rich compared to the historical average of 19.4 times earnings.

Bannister isn’t the only one sounding the alarm after the stock market’s recent rally. Wells Fargo strategy guru Scott Wren told investors to “bracket for more volatility” in his Wednesday note. “There are a number of potential issues that could drive financial market volatility in the coming months,” the senior global market strategist wrote.

Wren, like Bannister, cited the timing of the Fed’s interest rate cuts as a potential trigger for a market pullback. After projecting three interest rate cuts this year in March, Fed economists are likely to make only one or two cuts at the June Federal Open Market Committee (FOMC) meeting, according to Wren. That could spell trouble for stocks, as many investors still expect multiple (usually) market rate cuts this year.

“Will the old market bromide ‘sell in May and run away’ work this year?” That remains to be seen, but we don’t expect it [S&P 500] to earn a meaningful upset here by the end of the year,” Wren wrote.

The Wells Fargo strategist also warned that high food and energy prices will continue to weigh on consumer sentiment and the US election is likely to bring volatility to markets. He recommended that investors look at larger, so-called “quality” companies — those with strong balance sheets, low debt and strong profitability — in sectors such as industrials, materials, energy and health care that are outside the high-tech space. rated.

Similarly, Stifel’s Bannister recommended sticking to “quality” stocks in so-called “defensive value equity industries” that are often more stable, including health care, consumer staples and services sectors.

While both of these strategists see potential pain ahead for the markets, it’s not all bad news. Wells Fargo’s Wren concluded with some words of wisdom that every investor should remember from time to time: “The downside of equity, if we look at it, can provide opportunity. Get ready. Have a plan Get it together.”

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