Stocks heading for 10% correction as labor market slows and inflation remains sticky, says Stifel head

• Shares could be down 10% by the end of the year, says Stifel’s Barry Bannister.

• The bank’s head of stock strategy highlighted the slowing jobs market and the potential for persistent inflation.

• He added that interest rates are unlikely to fall below 3 percent without an economic slowdown.

The stock market could be headed for a year-end correction, according to Stifel’s Barry Bannister.

The investment bank’s chief equity strategist said investors should be cautious in the fourth quarter. That’s because the labor market is slowing and inflation could remain stickier than markets expect — two headwinds that could cause the S&P 500 to drop as much as 10%, he predicted in a recent interview with CNBC .

“When you put it all together, it’s a slowing economy, especially in terms of jobs — there’s a lot of choice and the market is expensive. So we certainly urge caution at the end of the third and fourth quarters.” Bannister said.

The slowdown in the labor market has already caught the attention of investors, who are watching for signs of continued economic weakness. 18 percent of U.S. consumers said jobs were hard to come by in September, compared with just 17 percent of consumers the previous month, according to the Conference Board’s latest consumer confidence survey.

Meanwhile, US companies announced more than 75,000 job cuts in August, a 193% increase from the previous month, according to a report from Challenger, Gray & Christmas.

Inflationary pressures could also linger around the economy, complicating the market’s view of steep rate cuts, Bannister suggested. Investors largely expect interest rates to fall to 3 percent or lower by the middle of next year, according to the CME FedWatch tool. But he says that’s unlikely to happen without the economy experiencing a slowdown, which is also bearish for stocks.

“It’s very hard to justify going below 3 percent without a slowdown,” Bannister said of interest rates. “If we don’t have a slowdown, if we continue to use these limited resources that we have, what you would have is a no-landing scenario where rates and yields should not be dramatically lower.”

Investors are also looking a little too bullish with stocks nearing their all-time highs, Bannister said. Nearly half of all investors said they felt bullish about stocks over the next six months, according to the latest AAII Investor Sentiment Survey.

“I have no problem with views that the Fed would be more dovish in 2024. It’s what people expect in 2025 that has started to be priced in and the 31% year-over-year gain in the S&P 500. It’s all just feeling very bubbly,” he added.

Read the original article on Business Insider