Goldman Sachs has predicted further pain for a raft of European indices over the short term, with one expected to be firmly in a bear market by the end of the year. The Euro Stoxx 600 is expected to fall by nearly 8% by the end of this year, the investment bank said in a report to clients on Monday. On Tuesday, the index fell by 0.1% and was trading around 388. It's also down around 8% over the last month. If it were to fall to 360, as Goldman expects, it would be lower by more than 25% from its recent peak earlier this year. Goldman predicted that the index of pan-European large companies will return to current levels over the next six months, but should increase to 410 in a year – a 9% rise, including dividends. The Wall Street bank also downgraded its price target for the FTSE 100 to 6600 and the Euro Stoxx 50 to 3100 for the next three months. That is a decline of 6% and 7.4% respectively from current levels. "We have been bearish on equities, arguing that this bear market is not yet over," the analysts said. What's driving the downgrades? Goldman said its forecast for a recession in Europe in 2023 had "deepened." It now expects euro area economies to contract by 0.4% next year, worse than previously expected. GDP in the U.K. is also likely to fall by 0.3% next year, according to the bank. The research note said that interest rate hikes by the European Central Bank and the Bank of England, along with soaring energy costs due to the reduced flow of gas from Russia, will lead to a "moderate" recession in the coming months. Although natural gas prices have fallen from their late August peak, they remain higher by at least ten times their long-term average. Goldman also said that while healthy household finances, a strong job market and subsidized energy prices will "soften the impact" of rising interest rates, it will be insufficient to mitigate it entirely. How to position Goldman Sachs is particularly bearish when it comes to earnings forecasts for European companies. A survey by FactSet reveals that analysts expect earnings per share for 2023 in Europe to grow by 3%. In contrast, Goldman expects EPS to decline by 10% next year. A number of other market participants are also turning negative on earnings expectations. "As growth slows, and costs continue to rise, we expect margins to be hit," the analysts said. The Wall Street giant predicted that retailers would be the most affected due to their dependence on consumer incomes for profits. The construction and chemical sectors are also vulnerable due to their exposure to high energy prices, it added. The bank is underweight on all three sectors. It is overweight (OW) on "some defensive" sectors, including healthcare and telecoms, as well as banks and energy. "We favour a barbell approach, with some quality areas, for example our High & Stable Margins basket ... where EPS is likely to remain resilient, some Defensives (OW Healthcare, Telecoms, Defence ...) and some Value areas which we think are particularly underpriced," the analysts wrote. Since February, Goldman Sachs said it had seen fund managers selling European shares every week. However, it warned that while the selling wasn't large yet, a comparison with previous downturns showed that there is more to come.