(Bloomberg) — Stalled-out progress on inflation, which will push Federal Reserve interest-rate cuts to later than traders currently expect, is probably going to trigger a big decline in US equities in the coming months, according to Stifel Nicolaus & Co.’s Barry Bannister.
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The S&P 500 Index will likely drop roughly 10% in the second or third quarter to around 4,750, the strategist and his team warned clients in a note Sunday. With Stifel projecting a mid-year increase in a key inflation gauge, the firm’s models indicate monetary easing will be further delayed, causing equities to plunge.
“The next 500 points for the S&P 500 are down,” Bannister wrote. Since late April, “we have been wary of a broad S&P 500 correction in the middle quarters of 2024.”
The stock market is up almost 4% this month, recouping the brunt of an April slump that came as traders dialed back bets on Fed easing this year.
Still, after a roughly 27% advance from lows touched in late October, investors have been at a crossroads about what might power the market to additional gains in 2024, particularly before a seasonally weak period and with Fed officials signaling they intend to to keep rates elevated for longer. Inflation data the next two days will present investors with the next big hurdle. Swaps rates reflect expectations that the Fed will start lowering rates in November.
Bannister was one of a handful of sell-side forecasters to accurately make a contrarian call on the US stock rally in the first part of 2023. He has since warned gains would stall, a projection that failed to materialize as the strength extended into this year.
The strategist said a “pseudo-recession” is already behind the US economy, having occurred in the roughly five quarters from the start of 2022 to mid-2023. Against that backdrop, the Fed’s aim of getting inflation back down to its 2% target is a “pipe dream,” he said.
In April, Stifel urged caution among stock investors, citing “frothy” valuations, sticky inflation and seasonal weakness from May to October.
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