S&P 500 may plunge 20% in coming months as recession hits, BofA warns

The inventory market may face one other tumultuous 12 months in 2023, with the S&P 500 experiencing a dramatic correction if the U.S. tumbles right into a recession, based on Financial institution of America strategists.

In a Monday analyst notice, the strategists warned the benchmark index may fall as little as 3,240 factors, or about 20%, from present ranges if the U.S. enters a recession in coming months.

“Historical past means that if the U.S. financial system experiences a recession, the SPX bottoms out in the course of the recession and never earlier than,” the notice stated. “Solely the March 1945-October 1945 recession noticed the SPX rally forward of and all through the recession.”

The S&P has already plummeted about 16% this 12 months as traders weigh considerations about stubbornly excessive inflation, steeper rate of interest hikes and the chance of an financial downturn subsequent 12 months. However the Financial institution of America strategists warned on Monday there could possibly be additional declines forward for the market.

“Common and median SPX declines related to recessions are 32.5% and 27.1%, respectively, and lasted 13.1 and 14.9 months, respectively,” they wrote. “This equates to SPX 3,500 to SPX 3,240 in February to April 2023, which aligns with the SPX peak to trough declines related to the cross of the 12-month MA beneath the 24-month MA on the SPX.”

Regardless of a slight deceleration in shopper costs final month – inflation rose 7.7% yearly, the slowest tempo since January – there’s nonetheless a rising consensus on Wall Road that the Fed will set off a recession because it raises rates of interest on the quickest tempo in a long time.

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The Federal Reserve in November accepted a fourth consecutive 75-basis-point price hike, lifting the federal funds price to a spread of three.75% to 4% – properly into restrictive ranges – and confirmed no indicators of pausing price will increase.

Though policymakers have indicated a choice for a smaller, 50-basis-point price hike at their assembly subsequent week, they’ve additionally signaled an urge for food for a better peak rate of interest that might additional limit financial exercise.

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“The time for moderating the tempo of price will increase could come as quickly because the December assembly,” Fed Chairman Jerome Powell stated throughout a speech in Washington final week. “Given our progress in tightening coverage, the timing of that moderation is much much less important than the questions of how a lot additional we might want to elevate charges to manage inflation, and the size of time it will likely be mandatory to carry coverage at a restrictive stage.”