US stocks could rally in the short term but haven't bottomed yet, Bhanu Baweja said.
The top UBS strategist sees underlying inflation cooling, and the US economy suffering a recession.
Earnings pressure, higher bond yields, and a global downturn will likely weigh on stocks, he said.
Stocks will slump, inflation will slow, and the US economy will suffer a recession, the chief strategist of UBS Investment Bank told CNBC on Wednesday.
"I don't think the lows are in," Bhanu Baweja said about the US stock market. The benchmark S&P 500 has tumbled 16% to about 4,000 points this year, while the tech-heavy Nasdaq index has plunged 29% to around 11,300 points.
Still, the veteran analyst suggested stocks could rally in the short run. He predicted the core Consumer Price Index, which excludes food and energy prices, will rise less than 0.3% this month. That could lead investors to lower their expectations of how high and for how long the Federal Reserve will lift interest rates, sparking a scramble to buy equities, he said.
"The market's looking for a very restrictive Fed for a very long time," Baweja said. "I think that will come down a little bit more with the next few CPI prints."
However, the top UBS strategist warned American companies could see a blow to their profits as the country slumps into a recession. Stocks are often valued on a price-to-earnings basis, meaning they're likely to retreat if there's a broad decline in earnings.
Moreover, UBS expects between a third and a half of the countries it covers to fall into recession, cutting global growth next year to 2%, Baweja said. If other nations are struggling, that could hurt spending and investment by foreigners in the US, and demand for American exports.
"We don't have the necessary conditions for a deep recession, but we have the conditions where global growth is going to be very weak," Baweja said.
"It's an inch deep but it's a mile wide," he added about the looming downturn. "That is not priced into stocks."
Overall, Baweja isn't bullish on stocks now that safer assets such as bonds are offering bigger yields, but he expects US equities to outperform their European peers in 2023.
"We're looking for pretty ordinary returns in equities, full stop," he said. "If the bulk of the problems next year are going to be in earnings, then Europe is more in harm's way than the US."
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