Bank of America warns stocks will fall into stagflation

this S&P 500 If the economy returns to the stagflation of the 1970s, the benchmark could be wiped out in a broad sell-off this month, according to Bank of America analysts.

In a recent analyst note, Bank of America strategist Savita Subramanian warned that a “worst-case” stagflation scenario — a rare combination of economic stagnation and high inflation — could send the benchmark S&P 500 down to 3,200 point, down about 17% from the current value. That would mark a staggering 33% drop from the start of the year.

S&P 500 falls into bear market, joins Nasdaq

The S&P has officially fallen more than 20% this year Enter a bear market On Friday afternoon, it was the first time since March 2020, when the COVID-19 pandemic began. High inflation, rising interest rates and the risk of a recession have rattled investors in recent weeks.

stock market crash

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

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-33.88 (-0.30%)

The benchmark has fallen for seven straight weeks so far this year, its worst performance since the dot-com bubble burst in 2001. Subramanian warned that investors should remain vigilant as “recession risks are taking over”, noting that current market conditions are reminiscent of the dot-com bubble.

What is stagflation?Why Economists Worried About the Disaster of the 1970s

“One of the reasons for our caution in our 2022 Outlook report is a series of similarities to 1999/2000, one of which is the acceptance of the unthinkable,” she wrote.

Wall Street has grown increasingly concerned that the Federal Reserve could inadvertently trigger a recession, and its war on inflation climbed 8.3% in April to near a 40-year high. Other firms predicting a downturn over the next two years include Bank of America, Fannie Mae and Deutsche Bank. Subramanian puts the probability of a recession at about 40%.

U.S. economic growth has slowed. The U.S. Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, the worst performance since the spring of 2020, when the economy was still in the throes of a COVID-induced recession.

inflation food prices

A man shoppers at a Safeway grocery store in Annapolis, Maryland, on May 16, 2022, as Americans brace for the summer sticker shock as inflation continues to mount. (Photo by Jim Watson/AFP via Getty Images)/Getty Images)

Federal Reserve policymakers already raised their benchmark interest rate by 50 basis points earlier this month for the first time in 20 years and signaled that more hikes of similar magnitude will be considered at the upcoming meeting as they rush to catch up with inflation . Chairman Jerome Powell Officials recently pledged to “keep pushing” until inflation approaches the Fed’s 2 percent target.

Still, he acknowledged there could be some “pain” from lower inflation and suppressed demand, but he rejected the notion of an impending recession, citing the labor market and strong consumer spending as bright spots in the economy. However, he cautioned that a soft landing is not guaranteed.

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“It’s going to be a challenging task, and it’s become even more challenging over the past few months because of global events,” Powell said Wednesday at a Wall Street Journal live event, referring to the war in Ukraine and China’s COVID lockdown.

But he added, “There are many possible paths to a soft landing or soft landing. Our job is not to limit the possibilities, but to try to make it happen.”

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