(Bloomberg) - US stocks haven’t seen the worst of this year’s declines yet against the backdrop of scorching inflation and a hawkish Federal Reserve, according to Bank of America Corp. strategists.
The “inflation shock ain’t over” and an earnings recession will likely drive stocks to news lows, strategist Michael Hartnett said in a note. Although the bank said US equity funds posted their biggest inflows in more than a month in the week to Sept. 14, stock markets have been under pressure again since Tuesday after a hotter-than-expected consumer price report fueled the S&P 500’s biggest one-day drop since June 2020.
His analysis of past bear markets also shows average peak-to-trough declines of about 37% for the S&P 500 over 289 days. That suggests the current bear market, which the benchmark index confirmed in June, will end in October with the gauge at 3,020 points -- 23% below current levels, the strategist said.
“World max bearish but we say new highs in yields equal new lows in stocks,” he wrote.
Hartnett is not alone in his pessimistic outlook for equities. Strategist Sharon Bell at Goldman Sachs Group Inc. this week warned against buying the dip, saying recent rallies weren’t decisive nor sustainable over a longer period. Counterparts at Societe Generale SA and Sanford C. Bernstein also said US stocks face fresh lows before the end of a bear market that has already erased over $7.8 trillion from the value of S&P 500 firms.
JPMorgan Chase & Co.’s Marko Kolanovic -- a stalwart equity bull -- is at the other end of the spectrum. He said on Monday the global economy could still avoid a hard recession and that the outlook for stocks is positive into the end of the year. Cathie Wood’s Ark Investment Management also bought the rout in US stocks on Tuesday.
The next cue for markets will come from the Fed’s policy meeting over Sept. 20-21 as investors bet on whether the central bank will hike rates by three quarters of a percentage point or deliver an even bigger increase. A hike of between 75 and 100 basis basis points is already priced in, Hartnett said.
In Europe, the exodus continued as the old continent grapples with a worsening energy crisis. Regional stock funds had a 31st straight week of outflows, the Bank of America note said citing EPFR Global data. Global equity funds had additions of $6.2 billion, led by $16 billion of inflows to exchange-traded funds. Global bond funds saw a fourth week of redemptions at $2.8 billion, the data show.
The bank’s custom bull and bear indicator edged up to 0.3, but remained in bearish territory. Although the pessimism in positioning is generally perceived as a contrarian bullish signal, stocks will see “only bear market rallies until policy pivots and investors can discount upward revisions in profits,” Hartnett wrote.
By trading style, US small cap, mid cap, value, growth and large cap funds all had inflows. Among sectors, consumer and energy saw the biggest additions, while $1.8 billion left materials.