Bank of America warns 'no landing' scenario could clobber stocks later this year

Fed tightening 'always breaks something,' top Bank of America economist says

The U.S. economy could be headed for a "no landing" scenario thanks to the hot labor market, but that might not be good news for the stock market, according to Bank of America analysts.

In an analyst note published Friday, Bank of America chief economist Michael Hartnett predicted a "no landing" scenario in the first half of the year, where there is no immediate slowdown in growth but inflation remains above trend. That would likely force the Fed to raise interest rates much higher than previously forecast — and keep them elevated for longer. 

"No landing means no Fed pausing," Hartnett wrote, warning that central bank tightening "always breaks something." He projected the S&P 500 could tumble nearly 7% by early March as a result.

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Ticker Security Last Change Change %
I:DJI DOW JONES AVERAGES 38441.54 -411.32 -1.06%
I:COMP NASDAQ COMPOSITE INDEX 16920.580419 -99.30 -0.58%
SP500 S&P 500 5266.95 -39.09 -0.74%

The continuation of the Fed's aggressive campaign to raise interest rates likely means that a "hard landing" outcome — in which the economy tumbles into a recession — will follow in the latter part of 2023, he said.

The gloomy forecast comes after a brutal year for the stock market, its worst since the 2008 financial crisis. All three indexes tumbled in 2022, snapping a three-year win streak. 

The Dow Jones Industrial Average ended the year down 8.8%, the best of the three. The S&P 500 sank 19.4%, while the tech-heavy Nasdaq composite plunged 33.1%. 

Stocks initially rallied in early 2023, although equities have lost some of that momentum amid rate-hike fears. The S&P closed Friday up about 6.67% from the start of the year, but down about 0.83% for the week.

Wall Street in New York

Wall Street suffered a brutal year in 2022.  (John Taggart/Bloomberg via Getty Images / Getty Images)

Federal Reserve policymakers voted to raise interest rates eight consecutive times to a range of 4.5% to 4.75%, and signaled last month that a "couple more" increases are on the table this year. 

But a slew of hotter-than-expected economic data reports, including the blowout January jobs report and a disappointing inflation report that pointed to the pervasiveness of high consumer prices, has raised the specter of a higher peak rate. 

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Those reports indicate the Fed's campaign to crush inflation is "very much unaccomplished," according to Hartnett. 

Federal Reserve Chairman Jerome Powell

Federal Reserve Chairman Jerome Powell arrives to speak during a news conference following a Federal Open Market Committee meeting in Washington, D.C., on Sept 21, 2022. (Sarah Silbiger/Bloomberg via Getty Images / Getty Images)

Hartnett is not alone in his pessimistic outlook: A BofA global fund manager survey published earlier this week shows that most investors are skeptical that the current stock rally will last. About 66% of respondents said stocks are seeing a bear market rally — signaling they expect them to return to new lows.