Morgan Stanley expects slowing loan growth and fewer interest rate hikes to hurt midcap bank fundamentals next year, warning that sentiment on those companies may stay negative if economic conditions don’t get better.

“The carefree days of rising rates and pristine credit quality could be coming to an end,” analyst Ken Zerbe wrote in a note Tuesday. “We cannot ignore the growing risk of a bear credit market next year preceding a recession as well as the negative impact of weaker economic growth,” both on credit quality and as a driver of slower loan growth.

The market is valuing bank shares as if the economy is headed toward recession, with few investors willing to increase their exposure “without clearer indicators of accelerating economic growth” that are unlikely to arise anytime soon, Zerbe said. The KBW Regional Banking Index is down 12 percent this year, compared with little change for the S&P 500. Its price-to-earnings ratio of about 18 is near the lowest levels versus the S&P 500 since 2008.

Loan growth may be muted as banks battle aggressive competition from non-bank lenders and a slowing economy. Morgan Stanley cut its 2020 earnings-per-share estimates, reduced price targets, and is “cautious” toward provision expenses.

Buybacks may offer a way out. Several banks have either started programs or said they plan to, Zerbe pointed out, including SVB Financial Group, Signature Bank, Comerica Inc. and Synovus Financial Corp. Those banks are among Morgan Stanley’s top overweight recommendations heading into 2019, along with Citizens Financial Group Inc. and KeyCorp, while the firm stays underweight on Webster Financial Corp. and Commerce Bancshares Inc.

“The banks are cheap,” Zerbe wrote. “The market, however, is bracing for the worst, and until it can be convinced that an economic slowdown is unlikely, a discussion of valuation probably won’t matter.”