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Investing.com -- Evercore ISI analysts warned in a note Monday that stagflation fears are mounting, with tariff policies and economic uncertainty creating potential downside risks for the S&P 500.
While Evercore’s base case projects the index reaching 6,800 by the end of 2025, they believe a scenario where GDP slows below 1.5% and core PCE inflation surpasses 3% could push the market toward their bear case of 5,200.
"Prolonged tariffs and DOGE uncertainty could raise core PCE by 0.5 percentage points by year-end and reduce monthly nonfarm payroll from 30,000 to 70,000," Evercore analysts wrote.
Such conditions could "paralyze the private sector, all of which could weigh on GDP" and fuel concerns of resurging stagflation, said the firm.
The S&P 500 has historically fallen at an annualized rate of 10% in stagflationary periods, according to Evercore.
If this scenario unfolds, they believe Energy and defensive sectors like Health Care and Consumer Staples could outperform. Additionally, earnings growth could stagnate, mirroring 2019’s 1% EPS growth rate.
For now, Evercore maintains its 6,800 year-end target but sees elevated uncertainty. "A big break below 5,700 without Trump policy moderation signals more downside risk," they warned.
However, Evercore notes that Trump closely watches market performance, making it likely that he will use policy “off-ramps” to prevent excessive market declines.
Given the volatility, Evercore suggests buying stocks when the VIX is high and options when the VIX is low.
They continue to favor AI enablers, adopters, and adapters as structural themes for long-term investors. However, if tariffs remain in place and economic growth slows further, "the fatter tail outcome” of S&P 500 at 5,200 could become reality.