Investing.com -- In a note Monday, Stifel analysts warned that despite the 2025 market euphoria surrounding themes like the "Trump Bump" and "American Exceptionalism," risks of stagflation could drive the S&P 500 down to approximately 5,500 later this year.

The firm highlighted three key concerns. First, the analysts challenge expectations of a seamless shift from growth-led to value-led leadership in the market, stating, "History and our economic views suggest otherwise."

They argue that this transition may not provide the smooth support investors are hoping for.

Second, persistent inflation is said to be a growing concern. Stifel predicts that Core PCE inflation will remain elevated, stuck between 2.7% and 2.9% year-over-year in 2025, "implying little possibility of rate cuts until GDP weakens," the note reads.

The firm adds that this inflation level is "above the Fed’s recently raised 2.5% view" and makes the Fed's 2% target even more elusive.

Finally, elevated Treasury yields and a flattening yield curve indicate potential weakness in U.S. economic data.

Stifel warns that this could lead to a "lower U.S. economic surprise index" in the coming months. Combined with sticky inflation, the analysts foresee a mild case of stagflation emerging in the second half of 2025, which they predict will contribute to a market correction of around 10%.

Amid these challenges, Stifel expects Defensive Value sectors such as Utilities, Pharmaceuticals, Biotech, Healthcare, and Household Products to outperform Big Tech and Cyclical Growth stocks. These sectors, they argue, are better positioned to weather the "weaker 2H25 GDP in tandem with sticky inflation."

“The combination of which is a mild case of ‘stagflation’ later this year contributing to an S&P 500 correction of -10% to ~5,500,” according to Stifel’s analysis.