The S&P 500 could see a 20% swing and reach 4,200 this year as the market weathers a mild 'economic malaise,' says Wells Fargo stock strategist

• The S&P 500 could see a swing of 20% this year on its way to reaching 4,200, according to Wells Fargo's Chris Harvey.
• But before hitting that level, the index has downside potential that could take it to 3,400.

The S&P 500 could see a 20% swing this year as the market navigates a mild economic downturn, according to Wells Fargo's head of equity strategy Chris Harvey.

In an interview with Bloomberg TV on Tuesday, he said there's downside risk of the S&P 500 falling to 3,400, representing a roughly 15% decline from current levels.

But ultimately, the index would recover and reach 4,200, up 5% from today, as inflation continues to slow and the market anticipates that the Federal Reserve will start to cut benchmark rates, he said. Between peak to trough, that suggests a difference of 23.5%.

"We think that, again, what you're facing is more of an economic malaise, not a sharp sell-off, not something that's going to be horrific," Harvey said. "And as a result, we can muddle through that."

He added that the Fed will stop hiking interest rates this year, and even if the central bank doesn't start cutting rates this year, "the market will believe that it's going to cut and we should see that reflected in the shape of the yield curve and interest rates."

The Fed hiked rates by 425 basis points last year and is expected to approve a few more quarter-point increases in 2023, bringing the peak rate to about 5%.

However, a still-robust labor market has raised fears of sticky inflation that could require the Fed to get even more aggressive on monetary policy, potentially sinking the economy and stocks.

JPMorgan Asset Management's chief investment officer Bob Michele told Bloomberg TV in a separate interview Tuesday that interest rates would ultimately reach 6%.

He added that the Fed has only had one rate-hiking cycle since 1988 that didn't end in recession, and he doesn't expect a soft-landing in 2023.

"The delayed and cumulative impact of all the tightening that we are seeing ultimately will bite," he warned. "It's incredibly aspirational to think we are going to get away with that."