Stocks are primed for a 10% correction in the second half of 2024, warns Stifel's chief stock strategist Barry Bannister. He attributes this to a challenging economic and monetary policy landscape.
Bannister, known for his bearish outlook this year, reiterates his stance, pointing to inflated valuations and a weakening economic outlook. In a recent Yahoo Finance interview, he cautions investors about imminent losses, predicting that sky-high valuations will soon clash with a deteriorating economic environment.
"We're worried about future returns being hampered by today's high valuations. Overpaying now guarantees lower long-term returns," Bannister emphasizes.
He estimates the S&P 500 is overvalued by about 10%, based on the market's equity risk premium. Other metrics, such as household stock ownership as a percentage of total assets, also indicate record highs.
Bannister predicts higher-than-expected inflation and lower-than-expected growth for the second half of the year. The economy shows signs of slowing, with GDP expanding by just 1.4% in the first quarter, while inflation remains stubbornly high at 3.3% in May, well above the Fed's 2% target.
This mix of slow growth and high prices mirrors the stagflation crisis of the 1970s, characterized by high inflation, sluggish growth, and poor stock performance.
Persistent inflation also dims the outlook for Fed rate cuts, posing further challenges for the stock market. The Fed might not cut rates at all this year, despite market expectations of two cuts.
"The market might pull back, and that's been our forecast. A 10% drop to around 4,900 wouldn’t be surprising," Bannister warns. "Consider getting more bullish in the fourth quarter. For now, be cautious and consider protective puts through the summer and early fall."
Other market veterans echo Bannister's caution. Some, like permabear John Hussman, predict a severe market crash, with stocks potentially falling up to 70% as valuations correct.
