Bank of America economists expect the US to slip into a recession in the first quarter of 2023.
That will become the dominant story for markets next year, the bank said.
The S&P 500 could plunge 24% from its current level by the end of the year, strategists warned.
Markets will be ravaged by a recession next year, with the benchmark US stock index potentially falling 24% from its current level, Bank of America has said.
The bank's base case is that the US enters a severe and sustained downturn in the first quarter of the year, when its economists expect growth to fall by 0.4%.
That would weigh on stocks, as companies would be forced 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 represent a 24% plunge from the S&P 500's Tuesday close of 3,958.
This year, there's been a process of payback for the boost markets have had from decades of low interest rates and stimulus, both fiscal and corporate, Subramanian said.
"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 rattle markets next year, according to Bank of America. Rising interest rates, red-hot inflation, war in Ukraine and the environmental crisis will also carry on spooking 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 plunge 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.
Subramanian's team expects the S&P 500 to bottom out at some point in the first half of next year, because stocks tend to trough six months before the end of a recession – which means there could be buying opportunities soon.
"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.