The US is already in a "rolling recession," according to Charles Schwab's Liz Ann Sonders.
Sonders said that could soon weigh on corporate earnings, with more downside possible for stocks.
But if a downturn is mild and the labor market stays strong, equities could be in for a rebound next year, she said.
The economy is already in a "rolling recession" that's starting to hurt corporate earnings – but that could set stocks up for a better 2023, according to Charles Schwab investment chief Liz Ann Sonders.
"We're already in a version of recession, we've been talking about it in the context of a rolling recession. There are pockets of the economy that are undoubtedly in recession territory," Sonders said in an interview with CNBC on Wednesday, pointing to weakness in areas of housing.
Meanwhile, CEO confidence and consumer confidence have plunged this year amid sky-high inflation, which, while on the downtrend, is still "certainly not anywhere near" the Fed's 2% target, Sonders said.
A rolling recession means those losses could soon spread to corporate earnings, Sonders said, which would likely hit the stock market sector by sector rather than crashing all at once. Still, it means more downside for stocks. Morgan Stanley's Mike Wilson warned that the S&P 500 could bottom out early in 2023 as earnings continue to deflate, and in a recent note, Sonders warned the market would likely be held back early next year by "Fed calls," or central bankers trying to stamp out enthusiasm for the stock market.
"For now, a weaker equity market helping to tighten financial conditions (not to mention rein in speculative excess) is a feature of Fed policy, not a bug," the note said. More rate hikes are also expected to weigh on equities as the Fed continues its battle against inflation, with investors pricing in a 50-basis-point rate hike to come in December.
But history suggests stocks could be in for a rebound after the Fed stops hiking rates – as long as the economy is boosted by a strong labor market, the note said, pointing to recoveries following previous Fed tightening cycles. If a recession is mild and the job market holds up, that could mean a better environment for stocks in the second half of 2023.
Other experts, however, still doubt the economy's resilience. Top economist Mohamed El-Erian warned that there wasn't enough evidence to assume a coming downturn would be shallow or short, and ex-Treasury chief Larry Summers said he saw the Fed overtightening the economy into a severe recession, spiking unemployment to 6%.
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