National Bank Financial is sticking with a target of 9,600 on the S&P/TSX composite index.

In a new report, NBF notes that the index is having one of its worst October starts since 1970, down about 6% so far.

NBF suggests there might be more downside. “The U.S. economy may soon be on the receiving end of a one-two punch,” it warns.

“First, inflation alarms seem to be sounding everywhere these days. Second, with the Fed set to tighten well into next year, we are convinced that the current rosy economic scenarios are overoptimistic and that U.S. consumer spending growth is about to slow,” it says. “This is a lose-lose prospect for corporate profits.”

“Companies facing higher costs will have two choices. They could pass the bill on to customers by raising prices. That would add to inflation and the Fed would have to tighten more, slowing the economy and profits. Or, if faced with slower demand, they could hold the line on prices and their bottom lines would take the hit directly,” it says.

With those options in mind, it notes that analysts are still calling for U.S. earnings to continue to grow at more than 10% for the next five quarters, although the long-term trend is 7%. Canadian growth expectations are even more optimistic at 20%+ over the same period, it adds.

“We are still very comfortable with our defensive stance,” it says. “We are, however, making some changes to our sector mix. First, we are downgrading the consumer discretionary sector to neutral, since the consumer slowdown will hurt this sector. Second, we are upgrading all industries of the IT sector to overweight, since it has lagged all other S&P/TSX sectors by a wide margin over the year to date and we see more and more signs of capital spending growth in the U.S.”