By David Randall

NEW YORK (Reuters) – Expectations of a hawkish Federal Reserve are dimming Wall Street’s outlook for stocks, with some investors now bracing for a potential bear market in the benchmark .

Bear market is often referred to as 20% or more of a decline from a high. It marks the end of the rally of the Pandemic Era that saw stocks rise to new heights thanks in large part, to unprecedented Federal Reserve stimulus.

After falling more than 2% Monday, the S&P 500 was recently around 16% below its high reached Jan. 3 as it struggles through the worst four-month start to a year since 1939. In March, the index fell to bear market territory and now stands at 26%.

A bear market isn’t inevitable, but signs of unease are evident as the Fed increases its monetary policy to curb the worst inflation for nearly forty years.

The U.S. Equity Mutual Funds and Exchange-Traded Funds saw $37 Billion in Outflows during the four week period, which is the highest four-week sum since late 2018 according to Goldman Sachs. Analysts Deutsche Bank (ETR:) in April forecast a recession accompanied by a 20% S&P 500 drop in 2023, while BofA Global Research strategists last week warned of “rate shock,” predicting the current decline in stocks will continue.

Bearish sentiment in a weekly poll taken by the American Association of Individual Investors stood at 52.9% the week that ended May 4, well above the average rating of 30.5%, while BofA’s survey of fund managers last month showed optimism regarding global growth at an all-time low.

“The Fed has been as slow to respond to inflation as they’ve ever been, and that is leaving me seriously negative on equities,” said David Wright, co-founder of $9.6 billion asset manager Sierra Investments.

Wright observes parallels between the current currency economic situation and 1981 when high inflation caused the Fed to launch a series rate hikes that pushed the economy into recession. In preparation for the bear market, Wright has reduced his holdings of equities. He is now moving to municipal bonds.

Federal Reserve last week announced a 50-basis point increase and said it intends to raise rates by 50 at its next meeting. Investors currently price in 209 base points of tightening for this year. This puts the central bank on course to tighten its belt at its highest level since 1994.

Sameer Samana, senior global market strategist at Wells Fargo (NYSE:), said the S&P 500 has a one in three chance of falling into a bear market if it slipped below what he saw as a technical support level of 4,100, a level it fell below on Monday.

John Lynch, Comerica’s chief investment officer (NYSE:) Wealth Management believes that the violent, 115% rally stocks witnessed from their COVID-19 lowests make them more vulnerable to a prolonged decline.

“It’s conceivable the S&P 500 needs to establish a bottom” that would take it into a bear market, given that the index hit 70 new records last year without more than a 5% pullback, he wrote Friday.

Based on data from Hartford Funds, 14 bear market events have occurred since 1945. Stocks lost 36% per day for 289 days.

Data from CFRA Research shows that bear markets can occur in conjunction with recessions. Analysts at Goldman Sachs recently estimated that 35% of Americans will experience a recession within the next year.

Some strategists do not see long-term losses.

Jonathan Golub Credit Suisse (SIX:) lowered his year-end target price for the S&P 500 down to 4,900 from 5,200 last week, a move that would imply a nearly 22% gain from the current level of the index and a roughly 3% gain for the year.

Truist Advisory Services’ analysts have downgraded the market targets they set last month, however, Keith Lerner, co-chief investment officer of the firm, stated that the analyst team has not become worse in the latest drop.

He wrote that there has been “a fairly good reset in valuations, investor expectations and a large amount of Fed tightening are already priced into market.”

Others, however, believe the Fed’s hyper-focus on inflation makes recession more likely and will continue pounding stocks.

Michael Harnett (NYSE: Chief Investment Strategist at Bank of America) stated that inflation means that the Fed needs to tighten up until the market or economy collapses. “Until the Fed does it, asset prices will have to reset lower.”