The U.S. economy has surprised investors, market watchers, and even the Federal Reserve over the past few months as inflation has decreased while the job market has remained strong after several interest rate increases. And while several prominent economists are now openly hopeful that the economy can manage a soft landing, not everyone is so sure that we aren’t headed for a downturn. 

The former chief economist and strategist for Merrill Lynch, David Rosenberg, thinks that the markets are in for more pain this year.

“The recession’s just starting,” Rosenberg said Tuesday morning in an interview with MarketWatch. “The market bottoms typically in the sixth or seventh inning of the recession, deep into the Fed easing cycle.” That means that given the Fed is still increasing rates, not easing them, Rosenberg sees the financial markets facing a prolonged period of uncertainty. 

He added that the S&P 500 could drop as much as 30% from where it is now before the Fed starts finally pausing or cutting interest rates. But on the bright side, he expects the Fed to cut rates in coming months.

“The stock market bottoms 70% of the way into a recession and 70% of the way into the easing cycle,” Rosenberg said. “What’s more important is that the Fed will pause, and then will pivot. That is going to be a 2023 story.”

When the Fed hiked interest rates by 25 basis points last week, Chair Jerome Powell struck an optimistic tone. But on Tuesday, his talk was tougher, and he warned that although the “disinflationary process” has started, last week’s blockbuster jobs report, in which the labor market added more than half a million new jobs, means the Fed could raise rates higher than it planned. 

“We’re going to react to the data,” Powell said. “If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in,” Powell said in an interview at the Economic Club of Washington, D.C.

Since the start of 2023, stocks have shown an upward trend despite the Fed’s talk of raising interest rates. 

“There is a disconnect between how investors feel about the outlook and how they’re actually positioned,” he said. “We are being told this is a widely expected recession, and yet it’s not reflected in earnings estimates—at least not yet.” 

And as for the looming recession that everyone is expecting, Rosenberg thinks that there could be a “major financial spasm,” which typically takes place when the Fed is hawkish, or following monetary tightening measures. But he added it won’t play out like the Great Recession of 2008 and 2009.