After months of optimism over the prospect of a US economic “soft landing,” more Wall Street watchers are now warning of another possible outcome: stagflation.
A bleak economic scenario in which growth stalls, inflation persists, and unemployment rises, stagflation has become the latest buzzword in financial markets as investors attempt to understand the administration’s shifting trade narrative and other policy uncertainties, including recent efforts from Elon Musk’s Department of Government Efficiency (DOGE).
“Stagflation worries [are] appearing as tariff and DOGE policies could spur inflation higher and weigh on economic growth,” Evercore ISI’s Julian Emanuel wrote in a note over the weekend, adding stagflation risks “would skew” the firm’s 5,200 year-end bear case for the S&P 500 (^GSPC).
Although Emanuel noted there are “no overt signs” of stagflation just yet as universal tariffs remain an unlikely outcome, the possibility has become more pronounced. According to Emanuel, the S&P 500 had an annualized fall of 10% during previous stagflationary periods.
As of 12:57:59 PM EDT. Market Open.
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In recent days, a number of Wall Street firms — including JPMorgan (JPM), Goldman Sachs (GS), and Morgan Stanley (MS) — have reduced their respective growth targets, referencing the anticipated effects of restrictive trade and immigration policies.
“If our narrative entering the year was ‘slower growth, stickier inflation’ then we now think ‘slower growth, firmer inflation,'” Morgan Stanley economist Michael Gapen wrote in a note, lowering his full-year GDP target to 1.5% from 1.9%.
On Monday, Goldman Sachs chief economist Jan Hatzius slashed his GDP forecast to 1.7% from 2.4% while simultaneously boosting his inflation outlook: “The reason for the downgrade is that our trade policy assumptions have become considerably more adverse.”
In recent weeks, surveys and sentiment indicators — often referred to as “soft” economic data — have been at the center of investor concern, marking the return of “bad news for the economy is bad news for stocks.”
Friday’s jobs report showed the US economy added 151,000 jobs last month, a positive sign for economic growth, but a slight uptick in the unemployment rate and increased wage growth left inflation fears lingering underneath the surface.
“The disappointing household survey, along with solid wage growth, underscores the risk of mild stagflation — softer but still positive growth and modestly higher inflation — in coming months,” Bank of America economist Shruti Mishra wrote in response to the data.
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