MW Why Wall Street's biggest bear is expecting a 14% stock-market pullback before the end of 2025
By Joseph Adinolfi
Investors are 'whistling past the graveyard,' according to a Stifel equity-strategy team led by Barry Bannister
A slowdown in the U.S. economy is becoming increasingly difficult for investors to ignore.
Wall Street's record-setting rally is headed for a reality check, according to Stifel's Barry Bannister and Thomas Carroll.
A record-setting comeback from April's stock-market tariff tantrum has left large-capitalization stocks sitting at nosebleed valuations. By several measures, stocks haven't been this richly valued since around the 2021 market peak.
So far, investors have been happy to pay a premium as President Trump's tariffs haven't pushed up consumer prices as aggressively as many economists had expected.
But as more data start to reflect the impact of the tariffs on the broader U.S. economy, the reality on the ground will become increasingly difficult for investors to ignore.
See: Is the economy as good as Wall Street says it is? Financial markets and the data are telling different stories.
That is why Bannister, Carroll and their team of equity strategists have warned clients that investors are "whistling past the graveyard" in their latest report, which was recently shared with MarketWatch. Bannister is Stifel's chief equity strategist and Carroll is the vice president of equity-portfolio strategy.
Quarterly GDP data and recent consumer-spending updates have suggested that the economy has already started to cool in the first half of 2025, Bannister and Carroll said in the report.
But the Stifel team expects an even sharper slowdown in the months ahead. As companies raise prices to offset the impact of Trump's tariffs, real unit sales of goods should begin to slow, as real wage growth likely won't keep pace with higher prices. That could jeopardize consumers' ability to keep ramping up spending, which could create problems for the broader economy. Consumption drives about 70% of economic activity in the U.S., official data show.
The result should be what Bannister and his team have described as "mild stagflation" that could kick off an "echo" of April's stock-market tariff tantrum. That previous episode briefly sent the S&P 500 SPX skittering to the edge of bear-market territory. A bear market is defined as a drop of 20% or more from a recent high.
Bannister and his team don't expect the selloff ahead will be quite as intense as what investors experienced in April. The Stifel team sees the S&P 500 falling as much as 14%, which would bring the index in line with their year-end call for it to hit 5,500. The S&P 500 was trading at around 6,389 on Monday, according to FactSet data.
Many expect the Federal Reserve will start lowering interest rates again soon, but the Stifel team believes rate cuts ultimately won't do much to boost investors' appetite for stocks, given already lofty valuations.
When laying out the evidence, Bannister and his team pointed to one closely tracked leading indicator, the composite reading on manufacturing- and services-sector PMIs, which they said points to a sharper slowdown in the months ahead.
U.S. households are also facing some constraints on their ability to continue bidding stocks higher. While the amount of cash on hand remains high compared with disposable income, the figure has shrunk substantially when compared with total household equity net worth. That could also help to undercut consumption if the market begins to soften.
Bannister and his team at Stifel are among the few remaining bears left on Wall Street. They have continued to hold firm while others have turned bullish.
Heading into the year, the Stifel team had among the lowest price targets for the S&P 500 among strategists tracked by Bloomberg. Stifel has stood by this call, even as other Wall Street strategists have repeatedly revised their own price targets.
Stifel isn't alone in expecting some turbulence ahead. Strategists at Deutsche Bank, Evercore ISI and elsewhere have warned that the market could be due for a modest pullback, or even a correction - typically defined as a drop of 10% or more from a recent high.
Investors can still find opportunities by shifting into more defensive, value-oriented names, the Stifel team said. They included shares of Philip Morris International (PM) and Abbott Laboratories $(ABT)$ on a list of the largest buy-rated defensive value names that investors might consider.
See: Stocks are sinking, and these 4 charts suggest a deeper drop might be just getting started
Stocks have powered higher since April. The S&P 500 has already tallied its fastest recovery into record territory ever recorded following a drop of 15% or more.
The market was trading mixed on Monday, with the S&P 500 marginally lower, while the Dow Jones Industrial Average DJIA was off by 160 points, or 0.4%, at 44,016 in recent trade. The Nasdaq Composite COMP was up by 27 points, or 0.1%, at 21,475.
-Joseph Adinolfi
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
August 11, 2025 13:42 ET (17:42 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
Comments