Wells Fargo says US stocks could tumble another 9% and warns 'cracks' are showing in the market

• Wells Fargo said US stocks could drop another 9% as "cracks" begin to show in the market.
• Equities have been on a wild ride in 2022, with a recent rebound giving way to sharp falls once again.

Wells Fargo has said US stocks could drop another 9% and cautioned that "cracks" are starting to show in the market as the Federal Reserve presses ahead with interest-rate hikes.

"We expect the S&P 500 index to break below 4,000 and, after that, 3,900 is the next key level of support," Wells Fargo's analysts said in a note Tuesday. "Below that brings the June intraday low of 3,636 back into the conversation."

Stocks have been on a wild ride in 2022. They dropped sharply in the six months to June, as the Fed began hiking interest rates aggressively to try to tame rampant inflation.

But they then rallied from mid-June to mid-August as traders bet the Fed would let up as the economy slowed, with the S&P 500 rising from 3,363 to 4,305.

However, that rebound has since run out of steam and stocks have headed downwards once again as the Fed has made clear it is intent on stamping out inflation with rate hikes. The S&P 500 dropped below 4,000 on Tuesday, as Wells Fargo predicted.

Wells Fargo's analysts, led by head of market strategy Paul Christopher, said one worry was that strains were beginning to show in the market — particularly when it comes to liquidity, a measure of how easy it is to buy and sell assets.

"Cracks in financial market liquidity are appearing," Christopher wrote. He said the corporate bond market in particular was showing some signs of stress as the Fed tightens monetary policy.

Christopher also said the Fed has made clear it plans to hike interest rates and keep them high until it gets inflation fully under control.

He cited Fed Chair Jay Powell's speech at the Jackson Hole central banking summit as evidence that the Fed will do whatever it takes to get inflation down to 2% to 3%, from its current level of 8.5%.

Wells Fargo said it thinks rate hikes will push the US into a recession in the middle of 2023. It said the economy is already slowing, with stressed households running out of savings, earnings falling rapidly when adjusted for inflation, and housing becoming increasingly unaffordable.

The bank said it expects the S&P 500 to finish in a range of between 3,800 and 4,000, from 3,986 on Tuesday.