BofA says that a hard landing will hit shares in the second half

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

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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 remain robust and central banks are likely to remain hawkish for longer. It will probably be followed by a “hard landing” in the latter part of 2023, they wrote in a note dated 16 February.

Wall Street Games out a “No Landing” in the Era of Stock Turbulence

Earlier this week, BofA’s global fund manager survey showed that most investors are not convinced that the stock rally in 2023 will last. Doubt has been fueled in recent days by hawkish comments from Federal Reserve officials and US producer price and inflation reports that pointed to continued upward pressure. US stocks fell and bond yields rose on Thursday.

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

Several strategists agree with Hartnett’s more cautious view. Morgan Stanley’s Michael Wilson said this week that US stocks are ripe for a sell-off after prematurely pricing in a pause in Fed hikes. He expects the shares to fall in the spring. And in a note on Friday, Barclays Plc strategists including Emmanuel Cau also said the stock rally is being held in check by sticky inflation.

According to Cau, technical and sentimental indicators have normalized “and are less supportive now, but also do not give clear sell signals”.

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

Investors continued to shun U.S. stocks in the week to 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, and Treasuries had their best start to a year since 2004, Hartnett wrote. Meanwhile, BofA’s private customers have put the third largest amount on record into bonds.

–With the assistance of Sagarika Jaisinghani.

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

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