• A “late” Fed could inflate the third stock market bubble in 100 years, according to Barry Bannister of Stifel.
• Bannister sees the S&P 500 rise up to 45% by mid-2023 due to poor monetary decisions.
• “The only way to avoid this systemic risk, because bubbles always burst, is for the Fed to switch to hawkishness,” Bannister said.
• Sign up for our daily newsletter here, 10 things before the opening bell.

The stock market could be poised to rise massively if the Federal Reserve does not quickly address a hawkish policy stance, according to Barry Bannister of Stifel.

In a Monday note, he set out his view that the S&P 500 could jump 45% to 6,750 by mid-2023 amid a “late” Fed that is slow to end its policy. monthly bond purchase program and increase interest rates. Bannister also sees the Nasdaq jump 64% to 25,000 if the Fed continues to clamp down on interest rates.

The Fed could avoid triggering the third stock market bubble in a century if it sticks to a hawkish policy of higher interest rates to control inflation, the note says, but any setback in the economy or a resurgence significant amount of COVID-19 could derail that path.

“If the last 225 years of history are any guide, populism (which the Fed and Treasury seem to be embracing) leads to bad choices and even worse results,” Bannister explained. “We believe the only way to avoid this systemic risk, as bubbles always burst, is for the Fed to heed its own financial stability report and move towards hawkishness.”

Investors will get a feel for the direction of the Fed’s policy this afternoon as President Jerome Powell is expected to announce an accelerated decline in monthly bond purchases and potentially indicate how many interest rate hikes could occur there. ‘next year.

If the Fed fails to prevent another stock bubble, a lost decade could be for investors, similar to the sideways market returns for investors in the 1930s and 2000s after the Roaring Twenties and the dot-com bubble, respectively.

And a short-term correction in equities early next year would not negate the potential of a Fed-triggered market bubble, according to the note.

“A correction before a final bubble is normal. For example, the -19.4% decline of the S&P 500 in the third quarter of 1998 before the tech bubble of 1999-2000 … The same thing happened in the years mad, with a -10.7% in mid-December 1928 as rates rose before the October 1929 crash, ”Bannister said.