Stock market could fall 10% as economy faces threat of stagflation, Stifel warns

There may be trouble on the horizon for US stock marketaccording to Stifel analysts.

In a Tuesday note to clients, the investment bank warned that stocks are headed for another selloff that could see the S&P 500 fall 10% by the end of this year’s third quarter.

Analysts suggested that sluggish economic growth and stubbornly high inflation — hallmarks of a phenomenon known as stagflation — would force the Federal Reserve to keep interest rates high, disappointing investors hoping for some rate cuts this year. .

“The scenario of no tapering (albeit with mild growth) and increased resource use with more stable than expected inflation (a moderate form of stagflation) places constraints on the Federal Reserve that outweigh their preference to facilitate,” the note said.

STAGFLATION FEAR IS BACK WITH A VENGEANCE

Pedestrians in front of the New York Stock Exchange in New York in February. 16, 2024. (Michael Nagle/Bloomberg via Getty Images/Getty Images)

Investors had previously bet on a series of aggressive interest rate cuts this year, but they have repeatedly pulled back on those expectations amid cautious messages from Fed officials and signs that inflation progress is slowing.

The market is now pricing in the Fed to cut rates at least once or twice this year, and that the first cut will come in September, according to CME Group’s FedWatch tool.

INFLATION GROWS 3.4% IN APRIL AS PRICES REMAIN HIGH

But Stifel analysts predicted the central bank would not cut rates at all this year as inflation remains abnormally high.

“We continue to forecast S&P 500 corrections of around -10% to ~4,750 before the end of Q3 2024 from the recent peak,” they wrote.

Stocks hit a new record high in mid-May, with the Dow Jones Industrial Average hitting 40,000 for the first time ever, but they have since fallen from those highs.

Indexes fell on Tuesday as investors await key jobs data from the Labor Department. The Dow Jones Industrial Average fell 54 points, while the benchmark S&P fell about 0.34%.

A Wall Street sign in New York in January. 27, 2023. (Photo: John Taggart/Bloomberg via Getty Images/Getty Images)

The gloomy forecast from Stifel comes after a volatile year for the market.

CLICK HERE TO READ MORE ABOUT FOX BUSINESS

All three indexes fell in mid-2023 amid fears Federal Reserve it would raise interest rates higher than previously expected – and keep them at record levels for longer. But they’ve recovered those losses and more, with the S&P 500 up more than 29% since bottoming out in late October.

Since the beginning of the year, the benchmark index has risen about 10.6%, while the Dow Jones Industrial Average has risen 2.5%. Meanwhile, the tech-heavy Nasdaq Composite is up about 12% year-to-date.