The U.S. stock market’s new year rally is doomed even though the economy may be heading into a so-called “no-landing” scenario where a recession is avoided as the Federal Reserve raises interest rates further.

That’s the warning from Bank of America strategists, led by Michael Hartnett, who expect the S&P 500 index SPX will be roughly 7% weaker by early March, as they waded into the “no landing” debate that is gripping investors currently

Hopes for a “soft landing”, that would see U.S. economic growth slow gently without tipping into a recession as borrowing costs rise, have faded recently following stronger-than-expected economic data. A “hard landing” where the economy does fall into a recession is not likely either and as a result the talk has been about a “no landing” outlook in which the economy keeps growing even as central banks keep raising interest rates. The term has been popularized recently by top Wall Street economist Torsten Slok.

“The no landing scenario continues, and the risks are significant that inflation will stay sticky around 5%, well above the Fed’s 2% inflation target,” said Slok in a fresh email on Friday.

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Slok has said that such a scenario will be tough on technology and highly leveraged companies which have led market gains thus far in 2023. Hartnett agrees as he expects that the second half of the year will get bumpy for markets and the economy.

A first-half 2023 “no landing” scenario will usher in higher interest rates and once the yield on the 10-year Treasury

heads above 4% — it currently trades sits at 3.879% — investors will see a “crack in homebuilders, semis, U.S./EU/Japan bank stocks,” said Hartnett and the team.

They remind investors that Fed monetary tightening — up 450 basis points in 11 months and the “most aggressive in decades, they note — “always breaks something.”

And while the BofA analysts acknowledge that equity positioning is light, they are concerned to see two-year government bond yields hitting fresh highs in both the U.S.

and Europe

A “feverish, violent narrative flips from recession to immaculate landing to CPI acceleration shredding Fed & government credibility… a failure to break 4,200 on the S&P 500 index ceiling means a swoon to 3,800 by Mar. 8,” said Hartnett and the team.

The Bank of America team’s view may have shifted somewhat from last month, when they predicted the S&P 500 would drop to around 3,600, before a rally later this year as investors began to expect a less aggressive Fed policy stance.

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