The S&P 500 could have another bad year, according to Wall Street analysts and bankers, who warn that the benchmark stock index is still not a safe bet for investors in the face of a slew of macro and market challenges.

The S&P 500 plummeted 20% in 2022, as inflation rose and the Federal Reserve raised interest rates aggressively.

These are the largest losses experienced by investors since the 2008 recession, raising concerns that the market is entering a new age of increased volatility and low returns.

BlackRock has advised investors that conventional playbooks and methodologies can no longer be depended on, and that portfolios should be prepared for a paradigm shift.

Analysts have identified four major reasons why the S&P 500 is expected to underperform this year.

1. A Drop in Earnings will Devastate Equities.

The S&P 500 is expected to produce dismal results this year, as the market is still recovering from the impact of Fed rate hikes in 2022, and decreasing inflation is expected to eat into corporate income.

The central bank raised interest rates by 425 basis points last year and hinted that they will begin to lighten up on tightening efforts in 2023.

However, stocks have already suffered, and the full impact of the rate hikes has yet to be seen in the market.

Morgan Stanley’s Chief Stock Strategist, Mike Wilson, calculated that investors’ expectations for corporate earnings in 2023 were around 20% too high, implying that the market could face the worst earnings recession since 2008.

He forecasted a 24% drop in the S&P 500 in the first half of the year, in line with projections from Bank of America and Deutsche Bank.

2. The Market’s Liquidity is Being Drained.

In addition to rate hikes, the Fed is swiftly shrinking its balance sheet by roughly $95 billion per month, a type of monetary tightening that can assist decrease asset inflation by removing liquidity from the market.

However, this will be a negative for many asset classes, including stocks, notably growth and technology equities, which have been supported by ultra-liquidity and traders desperate for bigger returns in the low-rate environment.

Since last April, the central bank has already reduced its balance sheet by $381 billion, and equities have fallen, wiping out much of the gains achieved during the previous period of near-zero interest rates and plentiful liquidity pouring around the market.

According to Morgan Stanley, the liquidity runoff is the “monster in the room,” and sustained tightening could force the S&P 500 to plummet another 15% by March.

Bank of America predicts a more moderate 7% drop.

3. The S&P 500 is a Crowded Market.

According to Bank of America’s Chief Stock Strategist Savita Subramanian, too many investors are clustered in the S&P 500, which will exacerbate any bouts of volatility, as traders hurry to sell en masse when trouble strikes.

“The difficulty is that everyone is relying on muscle memory to return to what they perceive to be the safest equity market, the S&P 500. The problem is that if everyone in the S&P 500 is selling at the same moment, the S&P isn’t actually that safe” Subramanian stated in a recent Bloomberg interview.

She recommended investors to avoid overcrowded sectors of the market, such as technology, and instead focus on energy and small-cap stocks.

4. Stocks Continues to be Expensive.

Despite last year’s sharp sell-off, stocks in the S&P 500 remain overvalued, according to market veteran John Hussman, who warns that the index might experience negative returns over the next decade.

Hussman, who coined the term “dot-com bubble” in 2000, observed that his preferred valuation metric in the S&P 500 was at a level close to where it was during the pinnacle of the dot-com boom.

That indicator has the finest track record of predicting long-run returns for the stock index, according to Hussman, who believes the S&P 500 still has room to fall.

“Notice how little the 2022 market downturn has had on valuations to yet,” he remarked. “Although recent market losses have reduced the most extreme speculative froth, our most reliable valuation indicators remain close to their 1929 and 2000 highs.“

He predicted that the S&P 500 would drop another 60% on a “very lengthy, intriguing voyage to nowhere,” bringing the index close to 1,500.

He predicted that the S&P 500 will return -6% on average over the next 10-12 years.

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