Michael Hartnett of Bank of America predicts that the US stock market will reach a new low in October due to September’s strong employment report.
The US economy added 263,000 jobs in February, exceeding expectations of 255,000, and the unemployment rate fell from 3.5% to 3.5%.
The employment report reinforced the Federal Reserve’s view that policymakers must continue to raise interest rates to slow the economy and control inflation.
And inflation is a real problem — not just in the United States, but worldwide, according to Hartnett, who estimates that nearly 2 billion people are experiencing inflation rates of approximately 10%, while 1.3 billion people are experiencing inflation rates of greater than 15%.
Hartnett pointed out valuation extremes that could be moderated further despite the market’s high inflation and ongoing concerns, indicating that there appears to be more downside potential despite the market’s high inflation and ongoing concerns.
He noted, for instance, that Tesla’s market capitalization is equivalent to that of the entire European banking sector and that US equities as a proportion of the MSCI World Index have just reached a new record high of 66%.
However, even Hartnett is tempted to purchase stocks in light of the nearly 25% decline in the S&P 500 year-to-date.
“So tempting to be a contrarian bull,” he said, citing the 15x forward price-to-earnings ratio of US stocks and the bearish consensus among investors.
Despite these optimistic indicators, Hartnett anticipates a difficult economic landing in 2023.”The only question for investors in 2023 is whether the economy will experience a hard landing or a soft landing,” BofA stated.
The argument for a hard landing includes the notion that if the Fed is indeed committed to achieving its 2% inflation target, Wall Street will continue to feel the effects of an interest rate shock. Hartnett noted that the average unemployment rate at the time of the last rate hike in previous rate-hiking cycles was 5.7%, indicating that job losses may be imminent.
And potential job losses could strain the economy and the banking system. He stated, “Risk of credit event remains extremely high.”
