- US stocks are likely to suffer more losses because of the “inflation shock” Bank of America announced Friday.
- According to the firm, consumer price inflation will not fall below 4%-5% in the near future.
- A “recession” in corporate earnings should also drive stocks to new lows, but the S&P 500 may exit its bear market in October.
According to Bank of America, the already poor year for stocks will continue as inflation rises and corporate profits fall.
The fed funds rate and US Treasury yields will rise to 4%-5% over the next four-to five months, as consumer price inflation is unlikely lower than 4%-5% soon. This was stated by the firm in its Flow Show note.
Michael Hartnett (chief investment strategist at Bank of America Securities) stated, “The inflation shock isn’t over.”
Stocks fell on Friday due to the Federal Reserve’s anticipated interest rate hikes. Treasury yields climbed higher to offset this. On September 21, the central bank will announce its fifth rate increase of 2022. Investors expected a 75-basis point rate increase from the current Fed funds range of 2.25 to 2.5%.
The following week, the August inflation rate 8.3%They came in higher than expectations. While gas prices declined, shelter and food costs increased. The Fed has set a 2% inflation target.
The 2-year yieldThe 3.9% mark was surpassed for the first time since 2007 and the10-year Treasury yieldIt hovered around 3.47%, close to an 11-year peak.
Hartnett stated that “World max bearish” but that “new highs in yields =new lows stocks.” The S&P 500 this year has lost roughly 19% and was around 3,856 on Friday.
An earnings “recession shock” should also be a catalyst for new lows. FedEx’s stance on the matter was also highlighted by the bank. Quarterly profit warningThe logistics company also dropped its earnings guidance of the year on Thursday night. In the last weeks of FedEx’s fiscal first quarter, global volume weakness accelerated.
Hartnett analyzed past bear markets and found that the average peak-to trough drop was 37.3% in 289 days. This suggests the the S&P 500 — which hit lows of the year in June — will see its bear market end on October 19 with the index at 3,020, representing a 23% decline from Thursday’s close.
