The stock market will sink in a stagflation scenario, warns Bank of America

The S&P 500 has been erased in a widespread sell-off this month, and the benchmark is likely to fall further if the economy experiences a return to 1970s-style stagflation, according to Bank of America analysts.

In a recent analyst note, Bank of America strategist Savita Subramanian warned that a “worst-case” stagflation scenario (the rare combination of economic stagnation and high inflation) could cause the benchmark S&P 500 to fall to 3,200, a drop of about 17% from the current level. values. It would mark an impressive 33% drop from the beginning of the year.


The S&P is already down a little over 20% this year, officially entering a bear market on Friday afternoon for the first time since March 2020, at the start of the COVID-19 pandemic. High inflation, rising interest rates and the risk of a recession have unsettled investors in recent weeks.

Traders work on the floor of the New York Stock Exchange (NYSE) on May 18, 2022 in New York City. ((Photo by Spencer Platt/Getty Images) / Getty Images)

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-33.88 (-0.30%)

So far this year, the benchmark index has been down for seven consecutive weeks, its worst period since the dot-com bubble burst in 2001. Subramanian warned that investors should be careful as “recession risks are taking over,” noting that market conditions are reminiscent of the dot-com bubble.


“In our 2022 annual report, one of the reasons we were cautious was the variety of similarities to 1999/2000, one of which was the acceptance of the unthinkable,” he wrote.

There are growing fears on Wall Street that the Fed could inadvertently trigger a recession with its war on inflation, which rose 8.3% in April, near a 40-year high. Other firms forecasting a recession in the next two years include Bank of America, Fannie Mae and Deutsche Bank. Subramanian calculated the odds of a recession at around 40%.

Economic growth in the United States is already slowing. The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly contracted in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still in the midst of a COVID-induced recession.

food price inflation

A man shops at a Safeway grocery store in Annapolis, Maryland, on May 16, 2022, as Americans brace for the shock of the summer label as inflation continues to rise. ((Photo by JIM WATSON/AFP via Getty Images) / Getty Images)

Fed policymakers already raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades and have signaled that more rate hikes of a similar size are on the table in upcoming meetings. as they rush to catch up with inflation. President Jerome Powell he recently promised that officials will “keep pushing” until inflation falls closer to the Fed’s 2% target.

Still, he acknowledged there might be some “pain associated” with lower inflation and reduced demand, but rejected the notion of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. Still, he has warned that a soft landing is not assured.


“It’s going to be a challenging task, and it’s gotten more challenging in recent months due to global events,” Powell said Wednesday during a Wall Street Journal live event, referring to the Ukraine war and COVID lockdowns. in China.

But he added that “there are a number of plausible paths to having a soft landing or soft landing. Our job is not to hurt the odds, it’s to try to achieve that.”

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