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Portfolio > Economy & Markets

3 Reasons Markets Could Get Worse Before They Get Better

By Dinah Wisenberg Brin

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What You Need to Know

  • The market hasn't fully priced in a recession, said Jill Carey Hall.
  • BofA sees more upside potential in small cap stocks, she said.
  • It's a better year for active than passive management, she added.

The stock market hasn’t fully priced in a 2023 recession and could slide near term before rebounding, a key Bank of America strategist said Thursday, noting the investment firm expects the S&P 500 to end the year at 4,000, slightly under its current level.

At the same time, Jill Carey Hall, head of U.S. small- and mid-cap strategy at Bank of America Global Research, didn’t rule out the possibility that the index could end the year much lower.

“Four thousand’s our year-end target and as a downside risk we’ve certainly thought as a bear case the market could go into the low 3,000s, but our base case, we end the year at 4,000,” she said on CNBC’s “Squawk Box.”

“There could be more downside risk near term. Heading into the year, sentiment had been very poor … we obviously saw the big January rebound but there’s risk we could see volatility from here,” she added.

3 Economic Predictions

Here’s what BofA expects for the rest of the year:

1. Two more rate hikes from the Federal Reserve.

“I think right now the focus is going to be on the economy and the backdrop,” Carey Hall said.

2. A mild recession to start in the third quarter.

She noted that markets usually hit bottom about six months before a recession ends.

3. Weak earnings ahead.

“We do think earnings still need to fall further,” Carey Hall said.

While corporate leaders have shown optimism on earnings calls, “actual guidance has been weak. Corporates have been resilient, margins only contracted slightly this quarter but there’s a lot of cross-currents going on right now.”

Small Caps and Other Bright Spots

“The market’s still not fully pricing in a recession in our view,” she continued, “so there’s more opportunity in pockets of the market, areas like small caps that have been more adequately pricing in the risks and where we can see more upside.”

She continued: “We do think it’s more of a year about picking your spots, active management over passive, we think the rest of the market outside the top 50 megacaps looks more attractive than the megacaps.” 

Tech looks risky, she added.

“Even amid all the layoffs, their labor relative to the real sales growth is still relatively bloated,” said Carey Hall. Things that have benefited tech stocks for years, such as low interest rates, are reversing, she said, adding that it’s a cyclical sector.

Dinah Wisenberg Brin

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