The stock market is falling again. ‘Goldilocks’ is eaten by the bear.

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The stock market recently experienced a goldilocks moment, a scenario in which inflation and interest rates fall without leading to a decline in economic growth.

But that fairytale state seems to be fading, andthe economy could befor a dose of reality.

The recent goldilocks phase comes as inflation eases, which simply means the Federal Reserve may soon stop raising interest rates. Meanwhile, the US economy, although growing at a slower pace, appears to be holding up.

Markets have responded in kind. The

S&P 500
is at the beginning of the year and it’s up about 11% since its 2022 low, which was reached in October. At the same time, government bond yields have fallen across the board. It’s a perfect environment for stock prices and inflation to fall, but the economy is still on solid footing.

Falling inflation and a strong labor market don’t get more Goldilocks than that, Bank of America strategists wrote.

At the same time, several factors signal Goldilocks’ peak, the strategists wrote.

First, the Fed could still be signaling more rate hikes than expected. Consumer inflation is still above 6% annualized, a far cry from the Fed’s 2% target, so the central bank may have more work to do. If the Fed signals more increases on top of the latest expected increases, yields would rise and stocks would fall.

Second, economic growth and earnings forecasts may not have bottomed out yet. Higher rates hurt the economy with a lag, and declining inflation means companies would raise prices to a lesser extent, while falling demand could also push down the number of goods and services sold. Lower earnings expectations from analysts could be on the way.

Perhaps that’s why the stock market fell on Tuesday and appears to be falling again on Wednesday. S&P 500 futures are down 0.9%, while

Dow Jones Industrial Average
futures are down 0.8%, and

Nasdaq composite
futures are down 1%.

The stock market craves moderate inflation and strong economic growth. The world is probably not there yet.

Write to Jacob Sonenshine at [email protected]