(Bloomberg) -- Of all the top Wall Street strategists who predicted a rocky first half for equity markets back in December, many warned about mounting economic and profit risks from higher interest rates, but no one saw the turmoil in the banking sector coming.

The sudden collapse of a number of US regional lenders, including Silicon Valley Bank, and the meltdown in Credit Suisse Group AG shares, caught the leading prognosticators by surprise as they had primarily focused on the fallout from recession risks, rising rates and inflation’s damage to corporate earnings. 

Michael Hartnett, chief investment strategist at Bank of America Corp., in December said that the next shoe to drop would be a “credit event” caused by the impact of policy tightening by the Federal Reserve, although he wasn’t expecting it to come from small banks. 

Many investors and strategists, even bearish ones, were confident about betting on banking stocks at the start of this year on the expected boost to earnings from higher rates. And some forecasters such as Max Kettner at HSBC Holdings Plc went so far as to turn optimistic about the broader market early in January, saying the pessimism in the rest of Wall Street would likely fuel a contrarian rally.

“There is no sugar coating this — our constructive view has proved pretty wrong lately,” Kettner said in a recent note.

While the S&P 500 was still up in March, the turmoil in the banking sector has halted a powerful rally in Europe and forced a rotation into defensive and growth stocks. Meanwhile the tech-heavy Nasdaq 100 has entered a bull market this year, its best first-quarter performance since 2012 — another trend that few strategists had foreseen.

Part of the challenge in forecasting such a crisis is timing. Strategists have mostly been right about predicting that stocks would endure a rocky first half of the year, and the latest bout of volatility has made the bearish voices on Wall Street including JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. more confident in their cautious outlook for 2023. Also, most prognosticators have longer term views when it comes to markets. 

Read More: Here’s (Almost) Everything Wall Street Expects in 2023

Here’s a scorecard of the forecasts of some of Wall Street’s most influential strategists:

Goldman Surprised

The team at Goldman Sachs was among those warning that stocks would face a tough recovery in 2023, given the projection for higher rates. Even so, strategist Sharon Bell said they were “surprised at the specifics” of how the weakness has played out in relation to the banking sector.

“We felt that with rates rising so fast, the US market was vulnerable,” Bell said in an interview. “But it’s one thing to say vulnerable and another to actually pinpoint the problems that can occur and that’s very, very difficult.”

Bearish Wilson

Morgan Stanley’s Michael Wilson — a stalwart equity bear — warned the S&P 500 faces a “volatile path” in the first half as earnings estimates start to decline. Profit forecasts have indeed started falling, and the strategist said last week that he sees room for a further drop that could spur sharp losses in equities. 

So far, Wilson’s call for a decline in the S&P 500 of as much as 22% hasn’t materialized. While the strategist — who ranked No. 1 in last year’s Institutional Investor survey for his correct call on the stock slump — predicts stocks will drop as earnings estimates and valuations continue to fall, he doesn’t anticipate they will hold at their lows for long. Wilson declined to comment when contacted by Bloomberg.

Minsky Moment

At JPMorgan, the team including Dubravko Lakos-Bujas and Marko Kolanovic also predicted a slide in stocks in the first half against the backdrop of a mild recession and Fed rate hikes. The strategists — who were among Wall Street’s biggest optimists through most of last year’s selloff — have now said they expect the first quarter to represent a “high point” for equities.

Bank failures, market turmoil and ongoing economic uncertainty have increased the chances of a “Minsky moment” — the end of a boom that encourages investors to take on too much risk, Kolanovic said in a recent note. 

Sharper Declines

Over at Bank of America, Hartnett in December had forecast that a credit event would mark the ultimate low point in stocks in 2023 — although he said it would involve non-bank lenders, or so-called shadow banks. The strategist has reiterated that he expects sharper equity declines this year.

Both Kolanovic and Hartnett declined to comment when contacted by Bloomberg.

Among European banks, Societe Generale SA’s Manish Kabra was one of the rare bearish voices on US lenders. The strategist has maintained an underweight view on the sector since 2021. “I’ll keep selling them until the yield curve is firmly positive,” he said in an interview. Kabra also remains cautious about the outlook for broader equities this year.

Few Bulls

Binky Chadha, chief US equity strategist at Deutsche Bank AG, had predicted a US equity rally in the first quarter, underpinned by a positioning squeeze. The strategist maintains his year-end target for the S&P 500 at 4,500 — implying gains of about 10% from current levels — but now sees the “path there as more gradual” rather than a sharp bounce back in the fourth quarter, he said in written comments.

At HSBC, Kettner upped his view on stocks in January after maintaining a “maximum underweight” through a fourth-quarter rally last year. But he’s sticking to that call despite the turbulence in the banking sector, saying in an interview that both sentiment and positioning are still downbeat enough to signal a contrarian improvement in the outlook.

“This is not a liquidity crisis or a capital crisis, it’s about confidence,” Kettner said. “We could easily look back in a couple of months and view this as a hiccup rather than something more sinister.”

For Morgan Stanley’s Wilson, it’s not so easy. While he does expect the recent stress in the banking system to mark the beginning of the end to the bear market, he said the process is likely to be very volatile. 

“The last part of the bear can be vicious and highly correlated,” Wilson wrote in a note on March 20. “Prices fall sharply via an equity risk premium spike that is very hard to prevent or defend in one’s portfolio.”

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