Charles Schwab analysts said in a note on Monday that stocks could spin three different ways as inflation starts to cool.
The bad: central banks could raise rates again. Inflation could rebound and cause even more turmoil. The ugly is that central banks will keep their rates high and cause stock prices to fall.
The European Central Bank has hiked by an unprecedented 75 points, and the Fed just issued its third rate hike of the year.
Markets could rebound if inflation continues to fall. Inflation in the US fell to 8.3% in August from 9.1% in July.
Brazil's central bank stopped hiking in August, and Norway's central bank said its most recent rate hike could be its last one.
Analysts said that if inflation begins to decline around year-end due to a softer labor market and easing housing inflation, markets could rebound. Central bankers are likely to remain cautious for any rebound of inflation as demand will take a long time to pick up again.
If central banks ease too much, inflation could return. The global policy rate for developed markets is still low and is even lower than it was before the Great Recession.
There is a chance that inflation may rebound if central banks stop hiking too soon or cut rates while the real policy rate is negative. It is possible that higher rates are needed to quell inflation.
The 70s and 80s had a "whipsaw" effect on stock prices when central bankers pivoted monetary policy too quickly.
The bank warned that the pattern of whipsawing may support a continued environment of volatility.
There is a chance that central banks will stay on top of inflation until it dies. Expect another year in that scenario.
Analysts warned that a deep recession would likely force analysts to cut earnings estimates.
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