Stifel Warns: A Reality Check for the Market is Coming

Stifel strategists Barry Bannister and Thomas Carroll believe Wall Street's record-breaking rally is poised to face a reality check. After a strong rebound since tariff-induced jitters in April, stocks have surged to new highs, leaving large-cap valuations stretched. Multiple indicators suggest current market valuations are approaching levels seen before the 2021 market peak. So far, investors have been willing to pay a premium for stocks because President Trump's tariffs haven't significantly driven up consumer prices as many economists predicted. However, as more data begins to reflect the tariffs' impact on the broader U.S. economy, the reality will become harder for investors to ignore.

"Blind Optimism" and Economic Deceleration

This is why Bannister, Carroll, and their equity strategy team are warning clients in their latest report that "investors are blindly optimistic." Bannister is Stifel's chief equity strategist, and Carroll is a vice president of equity portfolio strategy. Bannister and Carroll noted in the report that quarterly GDP data and recent consumer spending updates show the economy began to cool in the first half of 2025. But the Stifel team anticipates a more pronounced economic slowdown in the coming months. As companies offset the impact of Trump's tariffs by raising prices, real unit sales of goods will begin to decline because real wage growth may not keep pace with rising prices. This could jeopardize consumers' ability to continue increasing spending, creating problems for the overall economy. Official data shows that consumption accounts for approximately 70% of U.S. economic activity.

Risk of "Mild Stagflation"

The result will be what Bannister and his team describe as "mild stagflation," which could trigger an "aftershock" of the April "tariff tantrum." That previous volatility briefly pushed the S&P 500 (SPX) toward the brink of a bear market – defined as a drop of 20% or more from a recent high. However, Bannister and his team expect the coming selloff to be less severe than what investors experienced in April. The Stifel team believes the S&P 500 could fall a maximum of 14%, bringing it to their year-end forecast of 5500. According to FactSet data, the S&P 500 was trading around 6389 on Monday.

Limited Impact from Rate Cuts

Many expect the Federal Reserve to begin cutting interest rates again soon, but the Stifel team believes that, given the current already-high valuations, rate cuts ultimately won't significantly boost investor interest in stocks. In listing their evidence, Bannister and his team pointed to a closely tracked leading indicator – the composite manufacturing and services PMI – which they said signals a significant economic slowdown in the coming months. The ability of American households to continue pushing stock prices higher also faces some constraints. While the ratio of cash held by households to disposable income remains high, it has fallen substantially relative to total household net worth. If markets begin to soften, that could also weaken consumption.

Stifel's Contrarian Stance

Bannister and his team at Stifel are among the few remaining bears on Wall Street. They are sticking to their bearish stance as others turn bullish. At the start of the year, the Stifel team had the lowest year-end target for the S&P 500 among strategists tracked by Bloomberg. Even as other Wall Street strategists raised their targets multiple times, Stifel has stuck with its judgment. Stifel isn't alone in anticipating future volatility. Strategists at firms like Deutsche Bank and Evercore ISI have warned that the market may face a moderate pullback, or even a correction (typically defined as a drop of 10% or more from a recent high).

Opportunities in Defensive Stocks

The Stifel team says investors can still find opportunities by shifting to more defensive value stocks. They included Philip Morris International and Abbott Laboratories on a list of the largest defensive value stocks investors could consider, which were rated as "buy." This analysis does not constitute investment advice. Investors should conduct their own research before making any investment decisions.