Stocks could fall 20% as the Fed tightens, and a correction may already be underway, says Moody's economist Mark Zandi

• US stocks could fall as much as 20% as the Fed cuts back on its support, Mark Zandi said.
• The Moody's Analytics economist also said a correction may already be underway in equities.
• He told CNBC that higher interest rates would erode the value of companies' earnings.

NEW LOOK

Sign up to get the inside scoop on today’s biggest stories in markets, tech, and business — delivered daily. Read preview

Thanks for signing up!

Access your favorite topics in a personalized feed while you're on the go. download the app

Email address

Sign up

By clicking “Sign Up”, you accept our Terms of Service and Privacy Policy. You can opt-out at any time.

Equities could lose as much as 20% as the Federal Reserve cuts back on its support for the US economy, and the correction may already be underway, Moody's Analytics chief economist Mark Zandi has said.

"It does feel like the headwinds are building for the equity market," Zandi said Friday on CNBC's "Trading Nation." He said stocks may lose between 10% and 20%, and are vulnerable because prices have boomed since the spring of 2020.

"I don't think it'd be surprising that, once the Fed tells everyone that they're taking their foot off the accelerator and thinking about putting it on the brakes, the stock market would have a little trouble with that," he said.

Zandi's remarks came amid a sharp US stock market sell-off on Friday that drove the Dow Jones to its worst week since October.

The drop in stock prices was exacerbated by comments from St. Louis Fed Chairman James Bullard on Friday. He told CNBC that the Fed may have to raise rates in 2022 to try to tamp down stronger-than-expected inflation.

Stocks – which have soared under the Fed's ultra-loose monetary policy – dropped sharply, with the Dow Jones finishing 1.58% lower and the S&P 500 ending 1.31% down.

Zandi suggested a correction may already be underway, as investors worry about inflation and the Fed, CNBC reported. A correction is usually defined as a drop of 10% or more from recent highs.

"Instead of the Fed being a tailwind to stock prices and other asset values, it's going to start becoming a headwind," he said.

Zandi explained that a rise in interest rates would make stocks' earnings look less attractive, as higher interest rates depress the future value of companies' earnings.

The Moody's Analytics economist said he did not think equities would fall as much as 30%, however, as such a decline would entail a recession, which is unlikely, given the current strength of the US economy.