From Bank of America to Morgan Stanley, the Wall Street giants expect stocks to fall more than 20% next year. Here is what they said.

• Three major Wall Street banks expect the S&P 500 to fall more than 20% at some point next year.
• U.S. stocks face a recession, earnings outlook cuts and liquidity risks as the Fed raises rates.
• Here’s what Morgan Stanley, Bank of America and Deutsche Bank are saying about what could drive stocks lower.

Three major Wall Street banks are singing from the same pessimistic anthem sheet as each predicts that US stocks could fall more than 20% next year.

For Bank of America, a Federal Reserve-induced liquidity crunch could put pressure on the S&P 500 stock index. Meanwhile, Morgan Stanley and Deutsche Bank say a weaker earnings outlook and a U.S. recession could trigger the massive sale.

The benchmark has risen from an October low of around 4,000, but analysts believe the rally is just a reprieve from the bear market it entered this year.

The Federal Reserve’s aggressive interest rate hikes to fight inflation to 40-year highs, fears that its tightening could tip the United States into recession, and the fallout from the Russian invasion of the Ukraine sent the S&P 500 down 15% in 2022.

Now is the time to recoup stocks, which have grown accustomed to decades of low interest rates and easy money thanks to fiscal and corporate stimulus. Here’s where the S&P 500 is heading, and why, according to the big banks.

Morgan Stanley

Morgan Stanley expects the S&P 500 to fall 24% to between 3,000 and 3,300, likely in the first four months of 2023. Its chief U.S. equity strategist, Mike Wilson, sees an accumulation of companies lower their earnings outlook due to the recession, which is hitting stock market valuations.

“That’s when we think the deceleration in earnings-side revisions will kind of reach its crescendo,” Wilson told CNBC.

An economic downturn tends to mean that businesses and consumers cut back on spending, which results in lower business revenue. Higher interest rates make the cost of borrowing and therefore investing more expensive for businesses.

“The bear market is not over,” he said. “We have significantly lower lows, if our earnings forecast is correct.”

Wilson sees the S&P 500 ending 2023 near 3,900, but predicts a high level of market volatility.

“So while 3,900 sounds like a really boring six months – no, it’s going to be tough. It’s going to be a wild ride,” Wilson said. He added that falling earnings would cause severe pain for large-cap stocks, not just tech stocks.

Bank of America

Markets will be ravaged by a recession next year, with economic growth falling 0.4% in the first quarter, according to Bank of America.

He also predicts that the S&P 500 could fall 24% from current levels to hit 3,000 as companies are forced to cut their earnings outlook. This would mark a new low in the current bear market cycle.

But there’s another risk: Quantitative tightening (QT) by the Fed — where it removes about $95 billion worth of Treasuries and mortgage-backed securities from its $9 trillion balance sheet every month — could seriously disrupt market liquidity.

Bank of America said the coming recession will be different, in part because the “biggest bubble” is “monumental and unprecedented leverage risk for governments and central banks,” rather than consumers and investors. businesses. This could lead to liquidity risks in odd places, like the S&P 500, as the Treasury market fuels stock prices.

The bank also expects the benchmark to end 2023 at 4,000, but face price swings along the way.

German Bank

In its outlook for 2023, Deutsche Bank said it expects global equities to fall sharply as a severe and prolonged downturn hits the U.S. economy. But he sees the drop in US equities coming in the middle of the year, rather than the first few months.

He predicts the S&P 500 will rally to 4,500 in the first half, then fall more than 25% in the third quarter as central bank tightening tips the economy into a deep recession. That would take the index to 3,375.

“We read that the Fed and the ECB are absolutely committed to bringing inflation back to desired levels over the next few years,” David Folkerts-Landau, chief economist at Deutsche Bank, wrote in a note.

“Although the costs of this operation may be lower than in the past for the reasons we outline, it will not be possible to do so without at least a moderate economic slowdown in the United States and Europe and a significant increase in unemployment. “, he added.

Deutsche Bank has also been bearish on corporate earnings, and it sees earnings per share falling by an average of $222 to $195 the next day.

His team also sees stocks recovering by the end of 2023, as long as the recession does not last beyond several quarters. The S&P 500 is expected to rebound to 4,500 by the end of the year, according to the bank.