The stock market has been in free fall since the Fed said ‘pain was coming.’ Morgan Stanley says buckle up for another drop

“Fire and Ice” is not just a show about dragons and zombies in hbo. It has been Michael J. Wilson’s vision of the stock market through 2022.

Wilson, chief investment officer of Morgan Stanleyhas argued that stocks are battling a toxic mix of economic headwinds, which he calls “Fire and ice”—which are set to keep stock prices low through the end of 2023.

The stock market’s summer rally was cut short last month as investors digested a reaffirmation from the Federal Reserve. aggressive anti-inflation stance At about the same time that Europe’s energy crisis took a turn for the worse. But even after a roughly 9% drop in the S&P 500 since mid-August, Wilson says buyers should (yet) beware.

In a research note on Tuesday, the CIO noted that its fire and ice moniker “has proven to be an effective way to describe the first half of this year,” and expects that to remain the case through December.

Wilson believes that the stock market will experience “fire and ice, Part 2” in the coming months after the Fed chairman Jerome Powell’s comments at an annual central bank symposium in Jackson Hole, Wyoming, last week.

Powell argued A little bit of pain” may be needed to rein in consumer prices over the next year, and economists noted that asset prices (including share prices) will have to fall to achieve that goal. The S&P 500 sank more than 5% in the days after Powell’s comments, and Wilson says that was just the beginning.

fire and ice part 2

While some market pundits and investment advisers argued that the rally in stocks was a buying opportunity during the summer, Wilson has claimed that he was nothing more than a trap for investors all the time.

His argument was, and is, based on the idea that inflation and the Fed’s attempts to combat it with interest rate hikes act as “fire” against stocks, significantly lowering their valuations. Rising interest rates also increase the cost of borrowing for corporations, making it harder for them to invest in their future growth and turn a profit.

And at the same time, slowing economic growth, or “ice,” is reducing consumer spending and, by extension, corporate profit potential.

All of these headwinds are bad news for stocks, and Wilson argues that they are not going away any time soon. The CIO pointed to Powell’s comments in Jackson Hole, which “emphatically” dashed investors’ hopes for a “moderate turnaround” in interest rate cuts last month amid a weakening global economy.

Wilson also lowered his earnings forecasts for the S&P 500 on Tuesday, arguing that slowing economic growth and “lingering cost pressures, particularly on the labor side” from higher wages will compress corporate profit margins going forward.

He went on to note that the second half of the year should be “more icy than hot, as slowing growth becomes the biggest concern for stocks, rather than inflation and the Fed.” All of this means that the bear market is far from over.

“While we recognize the underperformance of stocks so far this year, we don’t think the bear market is over if our earnings forecasts are correct,” Wilson wrote.

Wilson’s “low low” for the S&P 500 in 2022 is about 13% below current levels at 3,400, while a low of 3,000 (or 23% below current levels) is possible by the end of year “if a recession comes.

The S&P 500 should then recover to 3,900 by the end of 2023, or 3,350 in a recession scenario, according to Morgan Stanley.

This story originally appeared on fortune.com

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