The S&P 500 stock index may drop by up to 26% within "months," said Morgan Stanley analysts.
The warning comes amid signals that the U.S. Federal Reserve (Fed) plans to continue raising interest rates to fight inflation.
A team led by renowned analyst Michael Wilson said that the Fed will not pivot from its policy of raising interest rates.
- January's stock rally was fueled by expectations that the Fed would pull back on its rate hikes due to easing inflation.
- The Fed's continued efforts to stem inflation leave stocks vulnerable and potentially overvalued.
- Wilson's team estimates that the U.S. equity market now exhibits an extremely unfavorable risk-reward ratio known as a "death zone."
- He expects the S&P 500 to fall by 26% from its last close sometime in the first half of 2023.
- U.S. stocks have rallied this year after entering bear market territory in 2022.
- Policymakers have warned that they may raise interest rates further, potentially harming corporate earnings.
