US stocks could slide a further 25% if the economy tips into recession, with risks to a sustained equity rally mounting, according to Deutsche Bank AG strategists.

With company profits set to drop, stock valuations still high and recession risks looming, the fundamental picture for stocks is challenging, strategists led by Binky Chadha wrote in a note dated Sept. 7. Still, investor positioning in equities is low, they added.

“The outlook looks relatively binary: in the event we slide into a recession, the selloff has much further to go,” Chadha said, reiterating that the S&P 500 Index could slide to as low as 3,000 points in his worst-case scenario — nearly 25% lower than Wednesday’s close. If recession is avoided, “we expect the market to rally back sharply to its prior peaks,” he said. His base-case scenario still sees stocks rising by year-end.