Stocks are set for a 10% correction amid stagflation and no rate cuts in the 2nd half of 2024, Stifel strategist says

The stock market is threatened as lofty valuations collide with sticky inflation and slowing growth, Stifel strategist Barry Bannister said.

• The S&P 500 could see a 10% pullback, Stifel's Barry Bannister said.
• That's because the benchmark index looks overvalued, according to several metrics.
• The economic outlook also looks precarious, given stubborn inflation and slowing growth.

The stock market looks poised for a correction, and a dicey economic and monetary policy environment could cause equities to dive 10%, according to Stifel's chief stock strategist Barry Bannister.

Bannister — who has cast a number of downbeat warnings on the market this year — reiterated his bearish outlook for stocks, given how far the rally has gone. Sky-high valuations are about to collide with a weakening economic picture, he warned, which could bring losses to investors as soon as this summer, he said in an interview with Yahoo Finance on Tuesday.

"We're concerned about future returns being lowered by the high level of today. There's no better way to get a low long-term return than to overpay in the current day," he warned.

The S&P 500 looks to be about 10% overvalued, Bannister estimated, citing calculations using the market's equity risk premium. Other valuation metrics, like household stock ownership as a percentage of total assets, are also at record highs, he said.

The economy, meanwhile, is poised to see higher-than-expected inflation and lower-than-expected growth in the second half of the year, he predicted. Economic growth has been slowing, with GDP expanding by 1.4% in the first quarter, according to the latest revision. Meanwhile, inflation has remained stubbornly elevated for two years, with inflation clocking in at 3.3% in May, still well above the Fed's long-run 2% price target.

Slowing growth and high prices are a precarious combination. The economic backdrop mirrors the stagflation crisis during the 70s, some forecasters have warned, a period marred by sky-high inflation, sluggish economic growth, and poor stock performance.

Sticky inflation also weighs on the outlook for Fed rate cuts, which poses more bad news for stocks. The Fed now runs a greater risk of being unable to cut rates at all this year, even though the market is eyeing two cuts.

"As a consequence, the market can pull back, and that's been our call … I wouldn't feel disappointed if it fell 10% to about 4,900," Bannister warned. "If you're going to be getting more bullish, maybe think about doing it in the fourth quarter, but I would be cautious, have some protective puts here going into the summer and early fall."

Other investing veterans have warned stocks are due for a comedown amid lofty valuations. On the extreme end, permabear forecasters like John Hussman have been sounding the alarm for a severe stock market crash, with equities falling as much as 70% as valuations correct.