Three top Wall Street banks are singing from the same downbeat hymn sheet, as each predicts US stocks could fall by more than 20% next year.
For Bank of America, a Federal Reserve-induced liquidity crisis could put pressure on the S&P 500 stock index. Meanwhile, Morgan Stanley and Deutsche Bank say lower earning outlooks and a US recession could trigger the selloff.
The benchmark index has risen from October lows to around 4,000, but analysts believe the rally is just a respite in the bear market it entered this year.
The Federal Reserve's aggressive interest-rate hikes to combat inflation at 40-year highs, fears its tightening could tip the US into recession, and the fallout from Russia's invasion of Ukraine have pulled the S&P 500 down 15% in 2022.
It's now payback time for stocks, which got used to decades of low interest rates and easy money from fiscal and corporate stimulus. Here's where the S&P 500 is headed, and why, according to the major banks.
Morgan Stanley expects the S&P 500 to fall 24% to between 3,000 and 3,300, probably in the first four months of 2023. Its chief US equity strategist, Mike Wilson, sees a build-up of companies lowering their earnings outlooks then due to recession, which hits stock valuations.
"That's when we think the deceleration on the revisions on the earnings side will kind of reach its crescendo," Wilson told CNBC.
An economic downturn tends to mean businesses and consumers cut spending, which translates into lower corporate revenue. Higher interest rates make the cost of borrowing and so investing more expensive for companies.