Three top Wall Street banks are predicting that the US stock market will fall next year.
The S&P 500 stock index could be under pressure due to the Federal Reserve's monetary policy. Lower earning outlooks and a US recession could cause the selloff.
Analysts think the rally is just a respite from the bear market it entered this year.
The Federal Reserve's aggressive interest-rate hikes to combat inflation at 40-year highs has caused the S&P 500 to fall 15% in 2022.
It's time for the stock market to payback itself after decades of low interest rates and easy money from the government. Major banks say that the S&P 500 is headed in a certain direction.
Morgan Stanley thinks the S&P 500 will fall to between 3000 and 3,300 in the first four months of 2020. Mike Wilson thinks that a build-up of companies lowering their earnings outlooks will hit stock valuations.
Wilson told CNBC that the deceleration on the revisions on the earnings side will reach its climax at that time.
Lower corporate revenue can be a result of an economic downturn. Investments are more expensive when interest rates are higher.
He said that the bear market is still going on. If our earnings forecast is correct, we have a lower low.
The S&P 500 is expected to finish near 3,900, but Wilson predicts a high level of volatility.
This is going to be difficult, even though 3,900 sounds boring. It's going to be crazy. Lower earnings will cause a lot of pain for larger-cap stocks.
Bank of America predicts a 0.4% drop in economic growth in the first quarter of next year.
As companies are forced to cut earnings outlooks, the S&P 500 could lose as much as 25% from its current level. It would be a new low in the bear market.
The Fed's quantitative tightening, where it trims around 95 billion in Treasury bonds and mortgage-backed securities each month from its $9 trillion balance sheet, could badly disrupt market Liquidity.
According to Bank of America, the coming recession will be different due to the "monumental, unprecedented leverage risk at governments and central banks". The S&P 500 could be at risk of liquidity risks due to the Treasury market feeding into equity pricing.
The benchmark index is expected to end at 4,000 but will suffer price swings along the way.
As a result of a downturn in the US economy, the global stock market is expected to fall sharply. The slump in US equities in the middle of the year is what it believes.
The S&P 500 will rally to 4,500 in the first half of the year before tanking in the third quarter as the central bank tightens. The index would go to 3,350.
David Folkerts-Landau, chief economist atDeutsche Bank, wrote in a note that the Fed and the ECB are committed to bringing inflation back to desired levels.
It will not be possible to do so without at least moderate economic downturns in the US and Europe, and significant increases in unemployment.
Earnings per share will sink from $222 to $195 in the next year, according to a report byDeutsche Bank.
As long as the recession doesn't last more than a few quarters, the team thinks stocks will recover by the end of the year. According to the bank, the S&P 500 should return to 4,500 by the end of the year.
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