Stock market will tank in stagflation scenario, Bank of America warns

The S&P 500 has gotten obliterated in a widespread sell-off this month, and the benchmark index is likely to drop even lower if the economy experiences a return to 1970s-style stagflation, according to Bank of America analysts.

In a recent analyst note, Bank of America strategist Savita Subramanian warned that a "worst case" stagflation scenario – the rare combination of economic stagnation and high inflation – could see the benchmark S&P 500 fall to 3,200, a drop of roughly 17% from current values. It would mark a stunning 33% drop from the beginning of the year.

The S&P has already tumbled a little more than 20% this year, officially entering a bear market on Friday afternoon for the first time since March 2020, at the start of the COVID-19 pandemic. High inflation, rising interest rates and the risk of a recession have rattled investors in recent weeks.

So far this year, the benchmark index has been down for seven consecutive weeks, its worst stretch since the dot-com bubble burst in 2001. Subramanian has warned that investors should be wary as "recession risks are taking over," and noted that current market conditions are reminiscent of the dot-com bubble.

WHAT IS STAGFLATION? WHY ECONOMISTS ARE WORRYING ABOUT A 1970S-STYLE CATASTROPHE

"In our 2022 year ahead report, one reason we were cautious was the array of similarities to 1999/2000, one of which was the acceptance of the unthinkable," she wrote.

There are growing fears on Wall Street that the Fed may inadvertently trigger a recession with its war on inflation, which climbed by 8.3% in April, near a 40-year high. Other firms forecasting a ... (Read more)

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