BofA Says Hard Landing to Hit Stocks in Second Half

(Bloomberg) — The delayed arrival of a US recession will weigh on stocks in the second half of the year, according to Bank of America Corp. strategists, who say a resilient economy thus far means interest rates will stay higher for longer.

Most Read from Bloomberg

A team led by Michael Hartnett is among those predicting a scenario known as “no landing” in the first half of the year, where economic growth will stay robust and central banks will likely remain hawkish for longer. That will probably be followed by a “hard landing” in the latter part of 2023, they wrote in a note dated Feb. 16.

Wall Street Games Out a ‘No Landing’ in Era of Stock Turbulence

Earlier this week, BofA’s global fund manager survey showed most investors aren’t convinced the equity rally of 2023 will last. Doubts have been fueled in recent days by hawkish commentary from Federal Reserve officials and US producer prices and inflation reports that pointed to continued upward pressure. US equities slumped and bond yields advanced on Thursday.

Recent economic indicators show that the Fed’s mission to bring down inflation is “very much unaccomplished,” Hartnett wrote. He expects the S&P 500 to slump to 3,800 points by March 8 — a decline of more than 7% from Thursday’s close — after the benchmark failed to break through a ceiling of 4,200 points.

Several strategists agree with Hartnett’s more cautious outlook. Morgan Stanley’s Michael Wilson this week said US stocks are ripe for a selloff after prematurely pricing in a pause in Fed hikes. He expects equities to bottom in spring. And in a note on Friday, Barclays Plc strategists including Emmanuel Cau also said the equity rally is being kept in check by sticky inflation.

According to Cau, technical and sentiment indicators have normalized “and are less supportive now, but don’t give clear sell signals either.”

Meanwhile, Wells Fargo & Co. strategists led by Christopher Harvey said a 3% to 5% pullback in US stocks in the near term creates an opportunity for investors to buy the dip. Unlike Hartnett, they see a hard landing as unlikely given the economy remains resilient.

Investors continued to shun US equities in the week through Feb. 15, with outflows totaling $2.2 billion, Hartnett said in the note, citing EPFR Global data. On the flip side, Europe saw inflows of $1.5 billion, while emerging-market stocks attracted $100 million.

Bonds had inflows of $5.5 billion, with Treasuries seeing their best start to a year since 2004, Hartnett wrote. Meanwhile, BofA’s private clients poured the third-biggest amount on record into bonds.

–With assistance from Sagarika Jaisinghani.

(Updates with Wells Fargo strategists’ comments in seventh paragraph.)