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• Stocks will be gripped by panic and retest October lows in the first half of 2023, according to Evercore’s Julian Emanuel.
• While equities have been hammered by rate hikes and inflation, investors have yet to see emotional volatility, he said.
• “There’s no bear market in history that hasn’t had that emotional volatility,” Emanuel told CNBC.

Stocks will be gripped by investor panic and retest lows in the first half of next year, according to Evercore analyst Julian Emanuel.

Emanuel pointed to difficulties faced by stocks this year, which he describes as a “lazy river of volatility” down to the 3,600 level, when the S&P was down 25% year-to-date in June to cap off its worst first-half of the year since 1970. The benchmark index has rebounded since then, but equities are still in for more downside, as investors haven’t yet seen emotional volatility, he warned. 

“There has never been a time where there was emotion in this market, real honest to goodness emotion, and there’s no bear market in history that hasn’t had that emotional volatility,” Emanuel said in an interview with CNBC on Tuesday.

That emotional volatility will come amid still-high inflation and a persistently hawkish Federal Reserve, which is expected to raise interest rates again on Wednesday. Guidance on future rate hikes will be determined by Powell’s remarks at his 2 p.m. ET press conference, but the Fed Chair has previously indicated the central bank needs to see a softer labor market before letting up on its campaign to cool down the economy. 

“You’ve never not had a recession with those kinds of numbers,” Emanuel warned. He predicted the S&P 500 would bottom by mid-2023, retesting the low seen in October at 3,491. Stocks would then rally to 4,150 by the end of 2023, just a 4% gain from current levels.

That’s in line with other estimates from Wall Street bankers, with Morgan Stanley, Bank of America, and Deutsche Bank predicting a 20% drop to stocks as the market gets ravaged by a recession. According to Emanuel, a downturn is necessary for the market to fully capitulate. 

“What is really is just getting closer to that recession,” comparing this bear market to the dot-com bubble. “You burst the bubble, you had a rally back, but the recession was still a year in the offing … Frankly, the most bullish thing this market has going for it is that everyone knows there’s going to be a recession.”