- The stock market is headed for a 10% decline over the next quarter, Stifel analysts warned.
- That's because "moderate stagflation" will take Fed rate cuts off the table, the firm said.
- Prices have remained stubbornly high while economic growth is slowing.
The stock market is headed for a sell-off in the coming months that will see the S&P 500 drop 10%, according to Stifel strategists.
The investment bank warned of weakness in stocks stemming from a mixed bag of economic conditions that will make the Federal Reserve unlikely to cut interest rates as investors are hoping.
Markets are pricing in a 57% chance the Fed could cut rates at least 50 basis points this year, according to the CME FedWatch tool, but central bankers are unlikely to ease monetary policy at all in 2024, Stifel predicted, as the economy looks on track to see a "moderate case of stagflation."
That's a tough scenario for the stock market, with sluggish economic growth and stubborn inflation leading to tepid returns for investors. GDP has already cooled from last year, with the economy growing just 1.3% over the first quarter. Inflation, meanwhile, came in hotter than expected for the first three months of the year.
High prices limit the Fed's ability to cut rates in 2024, the bank said, adding that it sees no cuts this year at all.
"The no-landing (albeit with soft growth) scenario and increased resource utilization with stickier-than-expectation inflation limits the Fed (a mild form of stagflation)," the note added.
Stocks also don't look like they're in a bull market by historical standards. When adjusted for inflation, the overall S&P 500 remains below its level at the end of 2021 — something that could be "emblematic of underlying problems" in the market, Stifel said.
"We continue to forecast the S&P 500 corrects about -10% to ~4,750 before the end of 3Q 2024 from the recent peak," strategists said in a note on Tuesday. "To be a 'Secular Bull Market' the requirement for over 100 years has been that the S&P 500 continues to make higher highs adjusted for inflation. When the inflation-adjusted S&P 500 transitions out of a Secular Bull Market it historically enters a 'Secular Bear Market,' which is a much more treacherous period for investors."
Other market commentators have warned of a rocky road ahead for stocks, despite the S&P 500's series of record-highs this year. By some metrics, stocks look highly overvalued, some investing veterans have said, warning of a steep correction on the horizon.