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How low could stocks go? Much further, analysts say

Traders work on the floor of the New York Stock Exchange on Sept. 23, 2022, in New York City. (Getty Images/Spencer Platt)

(The Hill) — In the midst of a bear market and with the Federal Reserve expected to hike interest rates even further, leading Wall Street analysts are eyeing one question with increasing concern: Just how much further could stocks fall? The precise answer is impossible to predict, but experts told The Hill they expect investors to see more pain before growth in the economy resumes. 

“Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable and their focus is on the timing, magnitude, and duration of a potential recession and investment strategies for that outlook,” Goldman Sachs analysts David Kostin and Ben Snider wrote in a note to investors last week. 


Major stock indices have now entered a bear market, indicating a drop of 20 percent from recent highs. The Dow Jones Industrial Average of major U.S. companies fell more than 300 points Monday to close at 29,260, down 20.5 percent from a January high of 36,800. 

The S&P 500 is down almost 24 percent on the year from nearly 4,800 in January. The technology-heavy Nasdaq index has lost more than 30 percent of its value over the same period, hurting from the higher debt levels its companies hold that make them particularly vulnerable to interest rate hikes.

Most of those losses have come since the Federal Reserve started raising interest rates in March from around zero percent to between 3 and 3.25 percent now. The central bank will raise rates as high as 4.6 percent next year, according to its median forecast released last week. 

In sketching out possible scenarios for the S&P 500, the Goldman Sachs analysts modeled a “soft landing” option for the index bottoming out around 3,600 at the end of 2022 before climbing back to around 4,000 at the end of 2023. The “hard landing” scenario has the index dipping closer to 3,100 in mid-2023 before closing out next year around 3,750.

The analysts also predicted that Treasury yields have further to climb, projecting higher returns for the 10-year through this year and into next.

“The hawkish Fed pivot has pushed real 10-year U.S. Treasury yields up by 240 [basis points, year-to-date] and risks are tilted towards higher rates. The real 10-year U.S. Treasury yield has surged from [negative] 1.1 percent at the start of the year to 1.3 percent, the highest level since 2011,” they wrote. 

Other big Wall Street investors are expressing similar thoughts about the inevitability of equity markets falling still further.

“The era of cheap financing is coming to an end, at least for the time being, at least until the Fed pushes the economy into a meaningful recession, at which point long-term rates will start to recede,” Dan Alpert, managing partner of Westwood Capital, said in an interview with The Hill. “The market is reacting to that because the impact on businesses, especially businesses that are interest rate-sensitive, is going to be negative, and businesses are going to have a difficult time expanding to the extent that they depend on borrowed funds.”

Alpert said the temptation to move away from investing in stocks and toward more stable government bonds with yields that have been rising steadily for the past two months is another force driving equity markets down. The yield on a 10-year U.S. Treasury note rose above 3.9 percent on Monday before settling around 3.85 percent.

“Folks who can go out now and get a risk-free return on a nominal basis of 3.7 percent on a 10-year Treasury are starting to rethink what they want to pay for equities,” Alpert said.

“The equity market has been at extraordinarily high historic rates for a long time now during this very striking recovery from the pandemic. And so those high multiples are not just a reflection on people’s thinking about the rate of recovery in the economy, but they’re a characteristic of the environment that preceded this where interest rates were incredibly low,” he added.

Market analysts for Deutsche Bank noted that recent dips in stocks are being complemented by falling commodity prices, an indication of slowing demand that may signal further retreat in equity markets.

“This global risk-off move was evident across asset classes, as the S&P 500 fell for a [fifth] consecutive session to close at its lowest level so far this year. That takes it beneath the June lows to levels not seen since late 2020, and leaves the index down by over 23 percent on a [year-to-date] basis,” Deutsche Bank analyst Jim Reid wrote in a Tuesday morning note. “This widespread selloff was seen amongst commodities, with Brent crude oil prices closing beneath $85 [per barrel] for the first time since January, and even the classic safe haven of gold slumped to a 2-year low.”

The Organization for Economic Co-operation and Development (OECD) revised its forecast for the global economy downward on Monday, driven by persistently high inflation affecting many countries as well as widespread monetary policies of rising interest rates. 

Compared to December 2021 forecasts, “global GDP is now projected to be at least $2.8 trillion lower in 2023,” the group of advanced economies announced Monday. 

“A key factor slowing global growth is the generalised tightening of monetary policy, driven by the greater-than-expected overshoot of inflation targets. Strict lockdowns associated with China’s zero COVID-19 policy have also impacted the Chinese and global economy. Shutdowns and property market weakness are slowing China’s growth to just 3.2 percent in 2022,” the OECD said in a report released Monday. 

But some voices within the Federal Reserve system are trying to keep a more optimistic outlook. In her first public speech as president of the Boston Federal Reserve, Susan M. Collins said Monday that the Fed’s desired soft landing is still a possibility.

“It is no surprise that, as monetary policy moves to a restrictive stance to transition the economy to more sustainable labor market conditions, there is apprehension about the possibility of a significant downturn. I do believe the goal of a more modest slowdown while challenging, is achievable,” she said.