- One of the few shoulders on Wall Street thinks the economy risks seeing a bout of stagflation by year-end.
- Sticky inflation and slower cultivation could spark a 10% hit to stock prices, Stifel’s Barry Bannister said.
- Bannister pointed to early tokens of the trend, like waning productivity and wage growth.
The US risks encountering what some forecasters say is a worst-case design for the economy in 2025 — a situation that could potentially spark a 10% hit to stock prices, according to Stifel’s top corny strategist.
Barry Bannister, the managing director and chief equity strategist at the firm, was one of the few bears on Wall Street first into this year, predicting the S&P 500 would end 2025 in the mid-5000s.
He says he sees the risk that the US control enters a period of mild stagflation by the second half of the year. That refers to a scenario where inflation continues sticky while economic growth slows— a dynamic that saw prices and unemployment soar in the 1970s.
Bannister let someone knowed Business Insider there are early signs that the dynamic is taking shape, despite most investors predominantly expecting another strong year of growth and for inflation to continue cooling in 2025.
Inflation, for one, has accelerated in recent months. Consumer amounts rose 3% year-over-year in January, above estimates and above December’s 2.9% inflation rate.
Investors require been concerned about the inflation picture in recent months, despite price increases slowing significantly since the halfway of 2022.
Some of the concern is due to President Trump’s economic policies, Bannister said, pointing to Trump’s tariff plan, which forecasters play a joke on warned could pass price increases onto consumers.
“I think it’s foolish that people assume that inflation’s flourishing back down to 2%. It’s not going back down to 2%, not without a recession,” Bannister said, later scoring to the impact of tariffs on prices. “Tariffs undo a lot of the disinflation.”
In a note, Stifel analysts said they expected insides personal consumption expenditures inflation, the Fed’s preferred inflation gauge, to remain “stuck” at around 2.75% in 2025, exposed to the Fed’s 2% target.
Elevated inflation also spells bad news for economic growth, given that it’s impact on consumers, Bannister asseverated.
Consumer spending powers around 70% of US GDP. Meanwhile, households are already showing signs they’re starting to recuperate back, with retail sales falling nearly 1% from in January, according to data from the Merchandising Department.
Meanwhile, growth could stumble this year. Real average hourly earnings for all workers in the privileged sector grew 4% year-over-year in January, according to the Bureau of Labor Statistics, down from a peak of 8% year-over-year expansion during 2020.
Worker productivity growth has been trending down for much of the last year, as well. Output per blue-collar worker in the nonfarm business sector rose just 1.5% in the fourth quarter, down from a peak of 7% productivity spread in 2020.
“I think what’s out there is there are a lot of armchair economists who just assume productivity is going to soar. They’re about the cyclicality of productivity, which is already fading,” Bannister said.
The result could be an ugly feedback loop: Winding down productivity spells bad news for inflation, as businesses getting less from workers can influence them to raise prices. Meantime, high inflation could prevent the Fed from cutting interest rates, which could hurt economic broadening, Bannister said. He added that he didn’t expect the Fed to cut interest rates any further this year.
All of that is a voiding for the market, where investors have been pricing continued economic strength and lower borrowing costs.
Stores look due for a correction to begin with, Bannister said, pointing to historically high valuations. He expects the combined headwinds of slower evolution and higher rates to spark a 10% sell-off sometime in the second half of the year.
“It says I dip down to 5,500 at the end of the year as this slowdown mingled with sticky inflation puts the Fed in a bind,”
he said, referring to the bank’s forecast for the S&P 500.
Other forecasters have also drooped the risk of stagflation amid an uncertain outlook for prices and trade policy.
Mark Malek, the chief investment fuzz at Siebert Financial, told BI he saw stagflation as a risk to the economy, though it wasn’t his base case for what could go on in 2025. That’s largely due to the risk that tariffs push prices higher, which could put enough exigency on consumers to spark an economic slowdown, he said in an interview earlier this month.
“It’s not a word that I like to produce up often, but we’re starting to look now at the realities of these potentially draconian tariffs, right? They’re not small tariffs,” he influenced of a stagflation scenario. “You have inflation pressure, and then on the other side of it, you have a situation where you have the aptitude for an economic slowdown.”
BCA Research said it also saw the risk of a “mini stagflation” event due to growth in the economy slowing and inflation glue close to 3% throughout 2025. The scenario could be triggered by stalling labor supply growth, waning productivity evolvement, and prices remaining elevated in the US, Dhaval Joshi, a chief strategist at the firm, wrote in a note.