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 sessions, since Fed Chair Jerome Powell spoke Thursday at the International Monetary Fund and expressed his commitment to fighting inflation with tighter policy. The S & P 500 was down 3.5% from its Thursday open through midday Monday. That has come even though Powell offered little new for a market that already had been expecting a 50-basis-point move in May, though his openness to additional hikes of a similar magnitude may have caught investors off guard. Allianz economic advisor Mohamed El-Erian said the market may be taking the Fed's intentions too far. "The marketplace is going to have to revisit this very aggressive path of hikes that is being priced in and ask the question, 'Does that make sense?'" El-Erian said Monday on CNBC's " Squawk Box ." "I have felt all along that the market was going too far in pushing the Fed to hike by as much as [and] by as soon as the market wants, and I think we're going to get a little bit of a revisit of that." What that means for the broader market remains unclear. El-Erian said U.S. stocks remain the best in a group of bad choices, but Colas thinks the bottom hasn't been reached yet. The latter view is also the outlook of Mike Wilson, chief U.S. equity strategist at Morgan Stanley. He said price action over recent days has been "fairly ominous" and he thinks the market has more downside ahead before recovering later in the year. "We're just not seeing the low," Wilson also told CNBC. "The silver lining [is] maybe we can finally complete this bear market over the next month or so."
Traders work on the floor of the New York Stock Exchange (NYSE) on April 25, 2022 in New York City.
Spencer Platt | Getty Images
Until investors stop worrying about the Federal Reserve and the path of interest rates, expect more losses, according to an analysis from DataTrek Research.