FOLLOW US

Markets will be crashed by a recession next year, with the benchmark US stock index potentially slumping 24% from its current level, Bank of America has said.

The bank argued that the US entered a downturn in the first quarter of the year when its economists expect growth to decline by 0.4%.

That would wreak havoc on stocks, as firms would be obliged to cut their earnings targets, they said in their 2023 outlook published recently.

"We think the market could drop as low as 3,000 based on a panoply of indicators, given a host of risks we face as payback continues and a recession unfolds," Savita Subramanian, the bank's head of US equity strategy, said. 

Hitting that 3,000 level would amount for a 24% plunge from the S&P 500's Tuesday close of 3,958.

"The bad news is, in 2023, the process of unwinding easy money could start to impact the economy," she said.

And it's not just a recession that will weigh down on markets next year, according to Bank of America. Hiking interest rates, persistent inflation, and war in Ukraine will also spook investors.

"The biggest rate shock in history, the most aggressive hiking cycle, the biggest inflationary pressure in 40+ years, rising recession fears, wartime and ongoing geopolitical risks, urgency building around carbon emission reduction suggest macro will loom large in 2023," the team led by Subramanian said.

All these factors played a key role in the stock selloff that has seen the S&P 500 fall 17% in 2022, they noted.

Bank of America's most likely investment outlook sees the S&P 500 creep up just 1% by the end of 2023, for a target of 4,000 points, with significant volatility coming before that point as the downturn rattles investors' confidence.

"The market typically bottoms six months before the end of a recession, so buy in the first half based on our economists forecast of the recession ending by the third quarter of 2023," they said.