Stock investors are 'delusional' to think the Fed can pull off its 'mission impossible,' says PNC's chief investor

• Stock investors are delusional if they expect a "no landing" scenario, PNC's Amanda Agati says.
• The Fed can't conquer inflation without triggering a recession, the bank's chief investor says.

Stock investors are dreaming of a "no landing" scenario where the Federal Reserve reins in price growth without tanking the economy. They could face a harsh reality check soon, one strategist has warned.

"The equity market is still delusional," PNC Asset Management Group's chief investor, Amanda Agati, told Yahoo Finance on Tuesday. It's "totally focused on no landing — the Fed is effectively pulling off mission impossible and getting inflation under control without tipping us into recession," she continued.

The S&P 500 and Nasdaq Composite have surged 14% and 29% respectively this year, as investors bet on a thriving US economy and an artificial-intelligence boom. Yet the bond market is "telling a very different story," Agati noted.

Short-term Treasurys are offering materially larger yields than long-term government bonds, signaling that investors expect the Fed to cut interest rates in the next few years, which the central bank typically does in response to a recession. An inverted yield curve has been a reliable indicator of past downturns, Agati said.

The bond market is "very much lining up towards that recession looming large later this year," she added. However, the strategist noted her team only expects a small decline in US GDP of between 1% and 2%.

"It's not the catastrophic recession that we saw in the financial crisis and certainly not at the onset of the pandemic," she said.

Agati also laid out how investors can navigate the tricky market backdrop. She advised them to maintain a diversified portfolio, focus on achieving long-term goals, and seek out higher-quality stocks and bonds.