Stocks Face Headwinds as Rates Rise and Liquidity Drains

The stock market is struggling as interest rates climb and credit spreads widen, tightening financial conditions. This will likely cause PE multiples to contract.

Liquidity is draining from the financial system as the Fed's balance sheet shrinks through quantitative tightening programs. Less liquidity tends to correlate with lower asset prices.

Credit spreads need to widen closer to historical norms after becoming too compressed, which will also weigh on equity valuations.

Margin debt and leverage levels rose along with the Fed's liquidity injections and may start declining again.

Given tighter financial conditions and fading liquidity tailwinds, the S&P 500 could fall to the 3,800 - 4,100 range over the next year.