High Inflation Could Trigger a 20% Correction in the US Stock Market
Royal Bank of Canada (RBC) warns that the US stock market is at risk of experiencing a correction of up to 20% if inflationary pressures remain high and force the Federal Reserve to maintain tight interest rates for a longer period. In this scenario, stock valuations—particularly in the technology and growth sectors—will be very vulnerable to repricing, similar to the market turmoil in 2022. RBC notes that investors have not fully priced in the risks of persistent structural inflation.
As a result, asset allocation strategies are likely to shift towards defensive sectors and hedging instruments such as gold and short-term Treasuries. A surge in bond yields could also add pressure to the equity market, narrowing investors' risk appetites. RBC advises investors to tighten risk management and reduce exposure to sectors that are most sensitive to high interest rates.