2022 was a not good, very bad year for the stock market. Will 2023 be any better?

The S&P 500 is down 20% so far this year, and with bonds simultaneously experiencing their worst year in history, there’s been nowhere to hide. After more than a decade of strong returns following the Great Financial Crisis of 2008, most investors are unaccustomed to this kind of carnage.

Between 2009 and 2021, the S&P 500’s average annual return was a hefty 16.4%, according to New York University. But don’t expect anything like these gains in 2023.

Investment banks’ average price target for the S&P 500 next year is about 4,000, suggesting shares will rise just 4%. When Fortune collected forecasts from a wider range of Wall Street economists and analysts, that number rose to 4,1[ads1]50, or an 8% gain in 2023. Still, it’s nothing most investors are used to.

While investment banks believe the S&P 500 will end 2023 just above where it stands today, Wall Street’s growing consensus is that the road there will be bumpy.

“Our main message to investors is to be careful. The Fed is trying to engineer an economic soft landing that, in our view, is highly likely to fail and cause a recession in 2023, said James Demmert, chief investment officer at Main Street Research. Fortune. “Stock indices are vulnerable at current levels.”

Watch out for a tough start to 2023

Across Wall Street, investment strategists are warning that stocks are off to a tough start to 2023 as the Fed enters the final stages of its fight against inflation. Year-on-year inflation, as measured by the consumer price index (CPI), has fallen sharply from a peak of 9.1% in June, reaching 7.1% last month.

But that didn’t stop the Fed from raising interest rates for the seventh time this year on Wednesday. Although critics argue that rate hikes are driving the US economy toward recession, Fed Chairman Jerome Powell said this week that he intends to “stay the course until the job is done.”

“Worse pain would come from a failure to raise interest rates high enough and that we allow inflation to become entrenched in the economy,” he said.

Against this backdrop, the stock market will probably struggle in the short term.

Morgan Stanley’s chief investment officer, Michael Wilson, said the S&P 500 could fall to between 3,000 and 3,300 in the first quarter — or as much as 25% below today’s level. Earnings will take a hit as companies grapple with rising borrowing costs and slowing economic growth, he said, arguing that investors are not yet anticipating the slowdown.

“Markets ignored the risk of a more hawkish Fed a year ago; the market now appears to be ignoring earnings risk,” he wrote in a research note on Monday, adding that the “risk/reward” proposition of investing in the S&P sees ” very unattractive” at the moment.

Scott Ladner, chief investment officer at Horizon Investments, said Fortune that he expects a 10% decline in S&P 500 earnings per share in the coming months as the Fed’s rate hikes slow the economy and hit corporate profits.

“We haven’t seen earnings taken down yet,” he explained. “We’re going into a period of slower growth, maybe a recession, and you just don’t get through recessions with earnings not falling at all.”

A second half comeback story?

While Wall Street consensus forecasts call for stocks to fall in the first quarter of the year, it’s a different story after that.

“We expect that when the market falls — maybe in the first quarter of the new year — we’ll start another bull market,” said Demmert of Main Street Research. “Although there may be further weakness in the first part of 2023, we expect 2023 to end with share prices significantly higher than current levels.”

Horizon Investments’ Ladner said he also expects markets to go through some “pain” in the first quarter, but after that investors can expect solid returns.

“We think the back half of the year could be pretty juicy,” he said. “Many things that were quite strong headwinds in 2022 may end up as tailwinds in 2023.”

Ladner argued that the big issues that hurt stocks this year — inflation, China’s strict zero-covid policy and the war in Ukraine — are likely to be resolved or improved in 2023, boosting markets.

The second half comeback task has become commonplace on Wall Street in recent months. Economists, investment banks and hedge funders are all warning that stocks – and the economy – are likely to struggle in the first half of the year and then rebound.

Morgan Stanley’s Wilson argues that after falling to 3,000, the S&P 500 could rise to 3,900 by the end of next year as inflation falls rapidly, prompting the Fed to halt its rate hikes as early as January.

While a second-half comeback story may seem to fly in the face of the consistent recession predictions from Wall Street this year, Ladner pointed out that stocks can actually perform well during recessions.

“Most of the retail business doesn’t understand that, but it’s the run-up to the recession and the first part of the recession that usually gives the markets trouble,” he said.

Ladner also argued that forecasts that stocks will be flat for a decade due to persistent inflation, deglobalization and rising interest rates strike him as “bets against innovation.”

“That’s a bad idea,” he said. “Just historically, it’s always been a bad idea in this country. So it’s not a bet we’re taking.”

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