US stocks are set for another major slump as financial conditions show “cracks” in response to the Federal Reserve’s policy tightening, Wells Fargo analysts warned in a note to clients this week.

The analysts project that the broad-based S&P 500 will hover between 4,000 and 3,800 by the end of 2022 after Fed Chair Jerome Powell signaled the central bank is committed to hiking rates until inflation subsides.

But further weakness “brings the June intraday low of 3,636 back into the conversation,” according to the Wells Fargo Investment Institute. That would mark a decline of approximately 9% compared to the index’s current level.

“The next few months could be choppy or lower for equity markets, while economic data weaken, financial conditions tighten, and financial markets eventually accept that the Fed and other global central banks will raise and hold rates until price stability returns,” the analysts said.

“The extent of further volatility will depend heavily upon the track of the global economic slowdown and central banks’ efforts to reduce the cash that drives spending,” the analysts added.

Wells Fargo
Wells Fargo sees a moderate recession through next year.
Bloomberg via Getty Images

The S&P 500 was trading below the 4,000 threshold on Wednesday as stocks gave back gains after a minor rally. The index is down about 5% since Powell warned the Fed’s plan to hike its benchmark interest rate would result in “some pain” for American households.

The Wells Fargo analysts noted that “financial conditions are showing cracks,” both in terms of household financial health and market liquidity.

“Stressed households are running out of resources,” the note said. “Even beyond limited savings and credit, falling equity market prices limit households’ ability and willingness to convert paper profits into cash.”

Fed Chair Jerome Powell said American households and businesses are in for some "pain."
Fed Chair Jerome Powell said American households and businesses are in for some “pain.”
Getty Images

Wells Fargo sees a “moderate recession” for the US economy through the middle of next year. Analysts set a target range of 4,300 to 4,500 for the S&P 500 in 2023 as the market adjusts to policy conditions.

Meanwhile, Fed officials have indicated that they do not expect to pivot and dial back interest rates in the near future.

New York Fed President John Williams told the Wall Street Journal that it is “going to take some time before I would expect to see adjustments of rates downward.” He said tightened policy is likely to “continue through next year.”


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