Rising Inflation Could Trigger 20% Fall in US Stocks

RBC Capital Markets has added another warning to investors around the world by saying that the US stocks may experience a sharp decline in the event of inflation rebounding forward due to geopolitics and energy prices. RBC has published a note giving a range of three possible outcomes on the S&P and these projections include a steep drop of 20 per cent by the end of the year according to the worst of the three scenarios.

The RBC analysis is characterized by an increased degree of nervousness on inflationary tensions, mostly in the six-year conflagration between Israel and Iran in the Middle East. The strategists don t think the oil prices will decline much once they rise, due to the sustained or intensified geopolitical tensions that will trigger inflation levels to soar high at 4 percent, pressurizing the equity markets that are already skewed due to the issue of prices.

Conflict Risks and Market Sensitivity

The RBC team also reported that geopolitically, the financial markets have been fairly tranquil despite wild waters. However, they argue that this composure may be short-lived. A more widespread eruption of conflict in the Middle East can lead to much higher volatility on the market, especially in case of the damage of major energy infrastructure.

The impending strife can cause a bit more anxiety concerning the health of the consumer, the general economy, and the direction followed by the Fed, the strategists cautioned, and this narrative change may be deleterious to the price of US shares.

Even as the oil prices moderated a little on Monday following a huge 7 percent gain on Friday, there are speculations on whether the combat will draw other concerned parties in the region. In case the clash further intensifies, the analysts anticipate inflation domino effect and investor mood.

Three Forecast Scenarios for S&P 500

RBC’s forecast is structured around three distinct scenarios:

Severe Scenario:

• Inflation spikes to 4%
• No earnings growth in 2024
• Only two Federal Reserve interest rate cuts
• 10-year Treasury yields remain elevated
• S&P 500 target: 4,800 points (approx. 20% drop from current levels)

Moderate Scenario:

• Earnings grow by 7% in 2024
• No significant inflation spike
• S&P 500 target: 5,200 points (approx. 13% decline)

Base Case (Current View):

• Balanced inflation and earnings outlook
• S&P 500 year-end target: 5,730 points (around 4% below current levels)

These underpinnings show the weakness in US equities at a time when the market was already believed to be overextended after a good rally earlier in the year.

Dissenting Views: Not All Analysts Are Pessimistic

Although RBC is careful in its intonation, not everyone in Wall Street holds this gloomy forecast. There was one hole in this dark picture. Michael Wilson, the chief US equity strategist at Morgan Stanley, had a more optimistic take. In a Monday note, Wilson argued that the actual corporate earnings may surpass the forecasts in the next quarters possibly keeping the stock valuation at play even despite exogenous shocks. The stand taken by Wilson indicates a much more general argument in financial circles regarding the extent to which the US economy and markets are actually resilient. Although inflation and interest rate plans are important issues of concern, strong consumer spending and the rising corporate margins have made some earmarked strategists consider that shocks might be cushioned by these supportive conditions.

The next actions of the Federal Reserve are also a major concern to the investors. Markets were buffeting with geopolitical uncertainty as inflation data remained volatile, so any rate cut decision would have had even greater effects. According to RBC, in case the Fed does not accelerate and restrict further rate cuts due to only easing inflation, equity values will also be put under more pressure.

The remaining half of 2025 may be characterized by the course of inflation, the policy of central banks, as well as geopolitical trends. Investors are being encouraged to take a more conservative stance where they factor in both likely downside risks in addition to the growth opportunities. The calm continues in the short-term but the bare projections of RBC are that volatility is just a whisker away in case of a worsening of macroeconomic and geopolitical circumstances.