The S&P 500 could fall another 28% before this historic sell-off is over and markets start bouncing back, BofA says

• US stocks have further to fall even after a steep decline this week, Bank of America said Friday.
• The Nasdaq this week fell 5% in one session as investors grapple with tighter Fed monetary policy.

The S&P 500's massive selloff during the week deepened this year's correction for the broad index, and it's likely to sink even lowers before finding a bottom and rebounding, according to Bank of America.

The bank's chief investment strategist in a note Friday said investors will spend much of 2022 working through inflation, rates and recession shocks that should result in negative and volatile returns in absolute terms.

"Past performance no guide to future performance, but if it were, today's bear market ends Oct 19th 2022 with S&P 500 at 3,000, Nasdaq at 10,000," Michael Hartnett, chief investment strategist at Bank of America Global Research, wrote in the weekly "Flow Show" note.

The S&P 500 would need to fall about 28% to hit 3,000 and the Nasdaq would have to drop by another 18% to reach 10,000, each from Thursday's close.

Whipsaw trading action on Wall Street wasn't far from investors' minds as they exited the week. Stocks soared Wednesday after Federal Reserve Chairman Jerome Powell said the central bank wasn't actively considering a large interest rate increase of 75 basis points, lifting the S&P 500 up by 3% and the Nasdaq Composite up 3.2%. The gains were wiped out just a day later, with rising bond yields pressuring equities, leaving the S&P 500 to lose 3.6% and the Nasdaq to slide 5%.

The S&P 500 so far this year is in a correction, down 14% from its all-time high of 4,818.62 notched on January 4. The Nasdaq is already in a bear market, suffering a 22% loss.

The "base case remains equity lows, yield highs yet to be reached," Hartnett wrote.

Bond yields have marched up to multi-year highs, with bond prices sinking as investors prepare for the Federal Reserve to continue an aggressive run of interest-rate hikes to tamp down on inflation. The central bank is widely considered behind the curve in tackling inflation which in March accelerated to 8.5%, the fastest increase since December 1981. The April CPI report is due next week.

The 10-year Treasury note yield and the 30-year yield have risen past 3%, the highest since November and mid-December 2018, respectively, according to TradeWeb, a fixed-income trading platform. The S&P 500's Information Technology sector lost roughly 4% this week, hit hard as higher yields can cut into the value of future earnings. Stocks are likely to come under more pressure as the Fed's hawkishness stands to push up bonds yields further.

Investors over the past nine months slowly priced in inflation and rate shocks but priced in "recession shock" too quickly. "[This] is a problem as stronger-than-expected economic data in H1'22 is causing market to price-in longer/bigger inflation/rates shock," said Hartnett.

While equities have slumped, "paralysis rather than panic best describes investor positioning" this year said Hartnett, who said for every $100 into equities in the past year or so, only $3 has been redeemed.

He also said since January 2021, the average entry point for $1.1 trillion of inflows was 4,274 on S&P 500, leaving investors "under water but only somewhat." The S&P 500 during Friday's session was around 4,126.

Bounce from bear market

For bear markets, the average price decline is 37.3% and the average duration is 289 days, Bank of America said in noting there have been nine bear markets in the past 140 years.

With those figures in mind, it worked out when investors could see the end of major bleeding from US equities.

The "good news is many stocks already there," with 49% of Nasdaq stocks more than 50% below their 52-week highs and 58% of Nasdaq issues down more than 37.3%. It said 77% of the index is in bear market, or down by more than 20%.

The "good news is bear markets are quicker than bull markets," said BofA.