The market won’t hit bottom until it gets a better handle on just how aggressive the Fed is going to be

Published Mon, Apr 25 20222:29 PM EDTUpdated Mon, Apr 25 20223:11 PM EDT

Until investors stop worrying about the Federal Reserve and the path of interest rates, expect more losses, according to an analysis from DataTrek Research. Anticipation for more interest rate hikes has coincided with another leg down for stocks. Just over the past week, expectations for tighter monetary policy have increased dramatically, with traders now looking for a fed funds rate that could approach 3% by the end of the year. That's the equivalent of 11 quarter-percentage point moves from here, and enough to generate nervousness from investors used to a Fed-supported market. But things could get worse if Wall Street keeps pricing in a more aggressive central bank. "We continue to believe that U.S./global equities will not bottom until markets stop discounting ever more aggressive Fed rate policy," wrote DataTrek co-founder Nicholas Colas. "We believe the chances of fresh 2022 lows for U.S./global stocks are very high. It's not that the current news flow is bad. The problem is that the range of potential economic outcomes is too wide to predict future corporate earnings with any certainty." As of Monday afternoon, traders were pricing in a 95.4% chance that the Federal Open Market Committee will enact a 50-basis-point rate hike at its meeting next week, according to the CME Group's FedWatch . A month ago, that probability was 72.7.%. A more dramatic move, though, has come in the longer-run outlook. End-year expectations were for the Fed to take its benchmark overnight borrowing rate to about 2.25%, and even that was a close call, with a 58.3% chance, as of a month ago. Now, the market is looking at 72.9% chance of the funds rate going to 2.75% and even a 23.1% probability of hitting 3%. A week ago, the market-implied probability of a 2.75% rate by the end of 2022 was just 28.2%, and a minuscule 4.1% for a 3% level. That's a big move, and it's coincided with a sharp market drop — about 5% for the S & P 500 and 7% for the small-cap Russell 2000. "Uncertainty drives equity valuations, and uncertainty over Fed policy and its effect on economic growth continues to increase," Colas said. The market has had an especially difficult time adjusting to the rate outlook in the past three sessi