One of the few bears on Wall Street worries stagflation could drive a 10% stock sell-off this year

• One of the few bears on Wall Street thinks the economy risks seeing a bout of stagflation by year-end.
• Sticky inflation and slower growth could spark a 10% hit to stock prices, Stifel's Barry Bannister said.
• Bannister pointed to early signs of the trend, like waning productivity and wage growth.

The US risks encountering what some forecasters say is a worst-case scenario for the economy in 2025 — a situation that could potentially spark a 10% hit to stock prices, according to Stifel's top stock strategist.

Barry Bannister, the managing director and chief equity strategist at the firm, was one of the few bears on Wall Street heading into this year, predicting the S&P 500 would end 2025 in the mid-5000s.

He says he sees the risk that the US economy enters a period of mild stagflation by the second half of the year. That refers to a scenario where inflation remains sticky while economic growth slows— a dynamic that saw prices and unemployment soar in the 1970s.

Bannister told Business Insider there are early signs that the dynamic is taking shape, despite most investors generally expecting another strong year of growth and for inflation to continue cooling in 2025.

Inflation, for one, has accelerated in recent months. Consumer prices rose 3% year-over-year in January, above estimates and above December's 2.9% inflation rate.

Investors have been concerned about the inflation picture in recent months, despite price increases slowing significantly since the middle of 2022.

Some of the concern is due to President Trump's economic policies, Bannister said, pointing to Trump's tariff plan, which forecasters have warned could pass price increases onto consumers.

"I think it's foolish that people assume that inflation's going back down to 2%. It's not going back down to 2%, not without a recession," Bannister said, later pointing to the impact of tariffs on prices. "Tariffs undo a lot of the disinflation."

In a note, Stifel analysts said they expected core personal consumption expenditures inflation, the Fed's preferred inflation gauge, to remain "stuck" at around 2.75% in 2025, above the Fed's 2% target.

Elevated inflation also spells bad news for economic growth, given that it's impact on consumers, Bannister said.

Consumer spending powers around 70% of US GDP. Meanwhile, households are already showing signs they're starting to pull back, with retail sales falling nearly 1% from in January, according to data from the Commerce Department.

Meanwhile, growth could stumble this year. Real average hourly earnings for all workers in the private sector grew 4% year-over-year in January, according to the Bureau of Labor Statistics, down from a peak of 8% year-over-year growth during 2020.

Worker productivity growth has been trending down for much of the last year, as well. Output per worker in the nonfarm business sector rose just 1.5% in the fourth quarter, down from a peak of 7% productivity growth 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 missing the cyclicality of productivity, which is already fading," Bannister said.

The result could be an ugly feedback loop: Waning productivity spells bad news for inflation, as businesses getting less from workers can influence them to raise prices. Meanwhile, high inflation could prevent the Fed from cutting interest rates, which could hurt economic growth, Bannister said. He added that he didn't expect the Fed to cut interest rates any further this year.

All of that is a negative for the market, where investors have been pricing continued economic strength and lower borrowing costs.

Stocks look due for a correction to begin with, Bannister said, pointing to historically high valuations. He expects the combined headwinds of slower growth 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 combined 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 flagged the risk of stagflation amid an uncertain outlook for prices and trade policy.

Mark Malek, the chief investment officer at Siebert Financial, told BI he saw stagflation as a risk to the economy, though it wasn't his base case for what could happen in 2025. That's largely due to the risk that tariffs push prices higher, which could put enough pressure on consumers to spark an economic slowdown, he said in an interview earlier this month.

"It's not a word that I like to bring up often, but we're starting to look now at the realities of these potentially draconian tariffs, right? They're not small tariffs," he said of a stagflation scenario. "You have inflation pressure, and then on the other side of it, you have a situation where you have the potential 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 sticking close to 3% throughout 2025. The scenario could be triggered by stalling labor supply growth, waning productivity growth, and prices remaining elevated in the US, Dhaval Joshi, a chief strategist at the firm, wrote in a note.