The stock market could plunge another 20% as investors search for a bottom, and the Fed could end up sparking a severe recession, Guggenheim's Scott Minerd says

• Stocks could plunge 20% next year as corporate earnings decline and the economy braces for a recession, according to Guggenheim's Scott Minerd.
• That could coincide with a severe recession, if the Fed sticks to its planned rate hikes next year.

Stocks could plunge another 20% as investors try to establish a market bottom, according to Guggenheim's Scott Minerd, who also warned that the Federal Reserve could spark a severe recession if it insists on sticking with its aggressive monetary policy.

In an interview with Bloomberg on Wednesday, the firm's global CIO warned investors that the market had yet to hit a low, as corporate earnings will continue to be hit by inflation headwinds and slowing demand in 2023. Combined with a potential recession, spells serious trouble for stocks. A mild earnings decline of 10% – which "isn't hard to predict," Minerd says – brings the S&P 500 earnings per share down to $200 from $220. He said he's eyeing a drop to 3,000 for the S&P 500, a slide of 20% from current levels.

"We're a long way from that sort of level today, and I think that once we get through this seasonal rally that we're living with, and the relief rally we got from the last meeting six weeks ago, we will renew the downtrend and we still haven't seen the bottom for stocks," Minerd warned.

Minerd's warnings echo that of other Wall Street commentators, who have warned that recent stock market rallies could be fleeting as high rates threaten to cause a recession. His S&P 500 estimate is in line with those from Bank of America, Morgan Stanley, and Deutsche Bank, who also warned that a downturn could ravage stocks next year as the Fed stays aggressive.

Prices cooled moderately to 7.7% in November, but are still well above the Fed's 2% target, prompting the central bank to hike interest rates another 50-basis-points this week and signal it would keep hiking next year. Economists fear inflation expectations could get out of hand if policy isn't restrictive enough, but that high of an Fed funds rate means a downturn is a done deal, Minerd said.

"I think it would probably put us into a pretty severe recession," he said. "The one piece of historic data that I can hang my hat on here is that the Fed has consistently been wrong in its projections."

The central bank has been slammed with criticism this year as inflation shot to a 41-year-high, leading market commentators to fault officials for being too late to tighten policy. Now, some are warning the Fed will be too late to loosen its policy in response to recession risks. Wharton professor Jeremy Siegel is among commentators who have warned the central bank is on the verge of overdoing it with its policy.