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After a stellar 2023, the stock market has continued to brush off the impact of stubborn inflation and higher interest rates this year<\/a>. The S&P 500 is up more than 12% year-to-date to a record high, topping the roughly 10% average annual rise in the blue chip index since 1957 in under six months. A strong first quarter earnings season and resilient economy have underpinned stocks\u2019 success, but some of Wall Street\u2019s top strategists still fear a downturn is on the way.<\/p>\n In a Tuesday note, Stifel\u2019s chief equity strategist Barry Bannister said he expects the S&P 500 to sink roughly 10% to 4,750 by the end of the summer. The Wall Street veteran\u2014who argued in 2023 that the stock market returns could be flat for a decade<\/a>, when adjusted for inflation\u2014cited three main reasons for his bearish outlook.\u00a0<\/p>\n The first, perhaps unsurprisingly, was \u201csticky\u201d inflation. Bannister has warned for months now that he believes the Federal Reserve already \u201charvested\u201d all the disinflation that typically comes with a recession during a 5-quarter-long \u201cpseudo-recession<\/a>\u201d that ended in the second quarter of 2023. In May, he even argued that this means Fed officials\u2019 goal to return inflation to 2% is nothing but a \u201cpipe dream<\/a>.\u201d<\/p>\n Bannister fears strong services spending along with rising healthcare, financial and insurance costs will lead to persistent inflation in that key sector of the economy. Tack on more housing inflation than previously forecast, a slowing productivity growth rate, and persistent wage growth and you have a recipe for a \u201cmoderate form of stagflation,\u201d he says.<\/p>\n This low-growth, moderate-inflation outlook could cut the S&P 500\u2019s price-to-earnings ratio\u2014a metric used to value the index\u2014by 500 points, the strategist warned, as investors account for lower potential revenue growth and higher costs.\u00a0<\/p>\n After stocks\u2019 surge this year, the S&P 500 trades at just over 23 times earnings, according to the Wall Street Journal<\/em><\/a>. That\u2019s rich, compared to the historical average of 19.4 times earnings.<\/p>\n Bannister isn\u2019t the only one sounding the alarm after the stock market\u2019s recent rise. Wells Fargo\u2019s strategy guru Scott Wren told investors to \u201cbuckle up for more volatility\u201d in his Wednesday note. \u201cThere are a number of potential issues that could spark financial-market volatility in the months ahead,\u201d the senior global market strategist wrote.<\/p>\n Wren, like Bannister, cited the timing of the Fed\u2019s interest rate cuts as a potential trigger for a market pullback. After projecting three interest rate cuts this year back in March, the Fed\u2019s economists are likely to pencil in only one or two cuts at the June Federal Open Market Committee (FOMC) meeting, according to Wren. That could spark issues for stocks, as many investors are still expecting multiple (typically) market-juicing rate cuts this year.<\/p>\n \u201cWill the old market bromide \u2018sell in May and go away\u2019 work this year? That remains to be seen, but we are not expecting the [S&P 500] to gain meaningful upside here through year-end,\u201d Wren wrote.<\/p>\n The Wells Fargo<\/a> strategist also warned that high food and energy prices will continue to weigh on consumer sentiment, and the U.S. election is likely to bring volatility to markets. He recommended investors look to larger, so-called \u201cquality\u201d companies\u2014those with strong balance sheets, low debt, and solid profitability\u2014in sectors like industrials, materials, energy, and healthcare that are outside of the highly-valued tech space.<\/p>\n Similarly, Stifel\u2019s Bannister recommended sticking with \u201cquality\u201d stocks in so-called \u201cdefensive value equity industries\u201d that are often more stable including the healthcare, consumer staples, utilities sectors.\u00a0<\/p>\n While both of these strategists see potential pain ahead for markets, it\u2019s not all bad news. Wells\u2019 Fargo\u2019s Wren concluded with a few words of wisdom that every investor needs to be reminded of from time to time: \u201cEquity downside, should we see it, can offer opportunities. Be ready. Have a plan. Buckle up.\u201d<\/p>\n<\/div>\n\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n