A best-case scenario for stocks is quickly fading, BMO says.

The bank said that a Goldilocks scenario — an ideal economic setup for stocks where the US economy continues to grow while inflation is subdued — looks less likely due to a confluence of factors that could spark a global slowdown and impact equities. In particular, the problems for markets are sticky inflation and higher interest rates, Mark McCormick, chief FX strategist at the bank, wrote in a recent note.

“Goldilocks is breaking down,” McCormick said, pointing to overlapping headwinds, such as China’s economy slowing alongside the US, and AI and energy creating distinct groups of “winners and losers” in the market.

Economic growth also looks like it’s “rolling over” around the world, having fallen below trend and on track to drift lower, McCormick added. The International Monetary Fund estimates that the world economy will grow 3% this year, down from the average growth rate of 3.5% over the last two years.

“Still not a recession signal; markets pricing a policy-led slowdown,” McCormick said.

Worries about hot inflation and higher interest rates have entered the spotlight over the last several months as the US-Iran war continues to put upward pressure on energy prices. With oil back over $100 a barrel, the big fear is that higher energy costs will translate into higher inflation, prompting the Fed to act more aggressively to raise rates.

Bond yields have already climbed amid to a sell-off in global and US bond markets, which recently pushed yields past the critical 5% level. The increase has been driven by investors recalibrating rate expectations, as well as weaker demand for US Treasurys amid concerns about the country’s fiscal health.

5% has long functioned as a key psychological threshold in the bond market and represents when yields are in the “danger zone” for stocks.

“Equities may wobble as US real rates hit cyclical highs,” he added.

The outlook for stocks has been challenged in recent weeks as investors digest the spike in oil and a jump in bond yields to the highest level in nearly two decades. The S&P 500 and Dow Jones Industrial Average are down 2% for the month, while the Nasdaq 100 is down 3%.