The S&P 500 notched its worst start since 1970, plunging 20.6% between January and June. The Dow had its largest first-half drop since 1962, and the Nasdaq Composite had its largest percentage decline ever.

A nasty combination of circumstances has been hammering stocks. Russia’s war in Ukraine has driven inflation higher, exacerbating concerns about how aggressive central banks like the Federal Reserve will need to be to rein it in. That’s boosted fears of a recession this year or next. Coronavirus lockdowns in China, the world’s second-largest economy, have also fed anxiety.

Predicting what will happen in markets over the next six months is unusually difficult. The path forward remains treacherous, with the Fed pledging to move one month at a time.

“It’s all about inflation right now,” Markus Schomer, chief economist at PineBridge Investments, told me. “That’s the only thing that matters, and how the Fed responds to it.”

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Optimists believe that at this point, the bad news is mostly priced in. Schomer noted that the core Personal Consumption Expenditures price index, an inflation measure that strips out volatile food and energy costs and is watched closely by the Fed, increased by 4.7% year-on-year in May, down from 4.9% in April.

“I think the picture is starting to come together,” Schomer said. “Supply chain disruptions are easing everywhere. Commodity prices are not coming down yet, but they’re not going up as fast either. All we need is oil to stay at $100 [per barrel] and inflation will come down.”

That’s a big “if,” of course, given the state of energy markets. Rising rent and housing prices — a stickier form of inflation — also require monitoring.

But Schomer thinks stock market sentiment is likely to improve in the second half of the year as investors realize the situation isn’t as bad as they previously thought and bet on the Fed successfully bringing down inflation without triggering a recession.

“I think we probably have a stabilizing market in the second half as we churn through this information,” he said. He predicts stock markets will finish the year above current levels.

Others remain skeptical that the worst is behind us. Strategists at Goldman Sachs told clients on Thursday that stocks could keep falling later this year since “equities are pricing only a mild recession” and more companies will likely begin reducing their earnings expectations.

In the event of a recession, Goldman’s team sees the S&P 500 dropping to 3,600, or 4.9% below Thursday’s close.

What everyone agrees: It’s going to stay rocky for some time, and iron stomachs will be necessary. The Fed’s job remains difficult, and there’s a big risk it goes too far, lifting borrowing costs so high that it really hurts business activity or consumer spending, and sends growth into reverse.

“Until the growth/inflation mix improves, markets are likely to remain volatile as investors shift between inflation frustration and recession obsession,” Goldman’s strategists said.

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