Bear stock market
- Investors shouldn't chase the current FOMO-fueled rally in stocks, Wells Fargo warned.
- That's because the economy risks rebounding inflation, which could easily weigh on stocks.
- The risk-to-reward tradeoff of entering the market at this point are unattractive, the bank said.
The FOMO-fueled rally in stocks might not last much longer, and the market is facing the risk of resurgent inflation, Wells Fargo said in a note.
"Our analysis suggests that now is not the time to chase the technology sectors that have driven the bulk of this rally. For a long list of reasons, we remain cautious and believe that in the nearer term stocks will struggle to move much higher," senior global market strategist Scott Wren said in a note on Wednesday.
Rebounding inflation is one of those risks, Wren said. Though prices cooled to 3% in the June Consumer Price index report, inflation is still above the Fed's 2% long-run target, and prices could heat up again as inflation pressures in the economy remain persistent.
Core inflation accelerated 0.2% in June, and though payrolls rose by a less-than-expected 209,000 jobs last month, the labor market remains resilient, a factor that could potentially drive inflation higher.
"If inflation's descent flattens out and reverses as interest rates rise higher, we believe the sectors that have driven this rally should be vulnerable to sharp pullbacks," Wren warned.
Wells Fargo predicted the S&P 500 would end the year between 4,600-4,800. That's slightly higher than current levels, with the benchmark index trading around 4,500 on Thursday – but the risk-reward tradeoff to entering the market at this point is still unattractive, Wren said.
Other voices on Wall Street have warned of trouble in the market to come, despite investors growing more enthusiastic on stocks in recent months. In addition to stubborn inflation, investors could also be slammed with a corporate earnings recession, Morgan Stanley has warned.