Bank of America warns of new lows for S&P 500 as 'inflation shock ain't over'

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The U.S. stock market is suffering one of its worst weeks this year as pessimism about the economy grows, and losses are likely to accelerate in the coming months against a backdrop of scorching-hot inflation and an aggressive Federal Reserve.

That's according to Bank of America strategist Michael Hartnett, who warned in an analyst note this week that the "inflation shock ain't over," and that a subsequent earnings recession will precipitate further declines in the market. 

The S&P 500 has already plunged more than 6% this week as concerns over sky-high inflation, rising interest rates and a darkening economic outlook continue to weigh on the market. The Dow Jones Industrial Average, meanwhile, is down more than 1,800 points, while the blue-chip heavy Nasdaq Composite has tumbled about 1.7%.

Hartnett said that past bear markets show an average peak-to-trough decline of about 37% for the S&P 500, the benchmark index, over 289 days. That would suggest the current bear market – which began in early June – will end in October with the gauge around 3,020 points. That would mark a nearly 22% decline from current levels. 

INFLATION ROSE FASTER THAN EXPECTED IN AUGUST, KEEPING PRICES PAINFULLY HIGH

FILE: A Bank of America logo is seen in New York City, New York, U.S. January 10, 2017. (REUTERS/Stephanie Keith/File Photo / Reuters Photos)

"History no guide to future but history says bear market ends Oct 19th 2022 (35th anniversary Black Monday) with S&P 500 at 3020 (note Nasdaq already down -29%)," he wrote. 

The analyst note comes just a few days after the Labor Department reported the consumer price index for August came in hotter than expected. Prices rose 0.1% on a monthly basis and 8.3% year over year, dashing analyst hopes for a decline in monthly decline.

Stocks fell sharply on Tuesday after the surprisingly hot report on fears of an even more aggressive Federal Reserve, with the Dow Jones Industrial Average sliding 1,276 points – the worst day since June 2020. 

Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., on May 4, 2022.  (Photographer: Al Drago/Bloomberg via Getty Images / Getty Images)

Investors are already bracing for the Fed's policy-setting meeting next week, which is slated to take place Sept. 20-21. Traders are betting on officials approving another super-sized, 75-basis-point rate hike – the third of its kind this year – at the conclusion of the meeting, although some on Wall Street think that central bankers could go even bigger with a full point increase.

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Hartnett said that markets have already priced in the rate increases, regardless of whether the Fed goes with a 75- or 100-basis-point hike. 

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