US stocks still have more downside as the 'inflation shock ain't over,' Bank of America says

• More losses are in store for US stocks as the "inflation shock ain't over," Bank of America said Friday.
• Consumer price inflation is unlikely to fall below 4% to 5% anytime soon, the firm said.

The already losing year in stocks is likely to worsen as inflation continues to run hot and investors see corporate profits shrink, Bank of America said Friday.

Watch for the fed funds rate and US Treasury yields to head to 4% to 5% in the next four to five months as consumer price inflation is unlikely to fall below 4% to 5% anytime soon, the firm said in its Flow Show note released Friday.

"Inflation shock ain't over," wrote Michael Hartnett, chief investment strategist at Bank of America Securities.

Stocks on Friday veered toward losses for the week in part as Treasury yields marched higher in anticipation of further interest rate increases by the Federal Reserve. The central bank is expected to deliver its fifth rate hike of 2022 on September 21. Investors widely expected a rate hike of 75 basis points from the current fed funds range of 2.25% to 2.5%.

Earlier this week, the August inflation rate of 8.3% came in above expectations. Gas prices fell but shelter and food costs rose during the month. The Fed's inflation target is 2%.

The 2-year yield edged past 3.9% for the first time since 2007, and the 10-year Treasury yield was around 3.47%, hovering near an 11-year high.

"World max bearish but we say new highs in yields = new lows in stocks," said Hartnett. The S&P 500 this year has lost roughly 19% and was around 3,856 on Friday.

An earnings "recession shock" should also be a catalyst for new lows. The bank pointed out FedEx's quarterly profit warning late Thursday in which the logistics company also ditched its earnings guidance for the year. Global volume softness accelerated in the final weeks of FedEx's fiscal first quarter.

In looking at past bear markets, Hartnett found the average peak-to-trough decline was 37.3% over 289 days. This suggests the S&P 500 — which hit lows of the year in June — will see its bear market end on October 19 with the index at 3,020, representing a 23% decline from Thursday's close.