Deutsche Bank maps out specifically how stock market will trade for the next 12 months as recession hits

Published Mon, Nov 28 20222:29 PM EST

The current bear market rally could continue into the new year before "following the typical recession playbook," according to Deutsche Bank. The bank outlined its view for the market over the next 12 months in a note Monday. It sees the S & P 500 climbing to 4,200 by the end of this year — about 4% from where it closed Friday — and reaching 4,500 by the end of the first quarter. Binky Chadha, chief global strategist at Deutsche, noted that he sees the S & P 500 holding roughly flat in the second quarter, before a big downturn in the third quarter. In the third quarter, Chadha said he sees the the S & P 500 dropping to 3,250. That's 19% below Friday's close. "Historical peak-to-trough recession declines are well explained by initial valuations which were very high and by the magnitude of the earnings decline (we expect -12% vs an average -15%). Putting these together points to a -33% decline" from the S & P 500's record high, he said. Chadha has been calling for a recession in 2023 since April. Back then, he said the bank was predicting a recession for late next year . By the fourth quarter, however, the strategist sees the S & P 500 recovering to 4,500, "as is typical," if the index follows the recession playbook. Deutsche sees the rebound being led by financial stocks, tech and consumer cyclicals. It's neutral on energy and industrials and underweight defensives, the note said. Recession-related bear markets typically see several (three, on average) rallies of about 10% on average. The current bear market has already seen five, Chadha noted. "With the S & P 500 having rallied recently by around 12% from its mid-October lows, our measure of aggregate equity positioning has risen only modestly and remains very low (12th percentile)," he said. Chadha also laid out some alternate scenarios. If the recession is longer then the recovery from the bottom would shift to early 2024, he added. But, if it turns out the Federal Reserve executes a soft landing and there is no recession, the S & P could end the year even higher at the 5,000 level. — CNBC's Michael Bloom contributed reporting.