Although the home improvement sector has held up relatively well amid a challenging macroeconomic environment, Credit Suisse sees a bumpy road ahead.

That's why the investment bank is urging investors to remain on the sidelines for now.

"Key housing and consumer metrics continue to point to an increasingly soft environment, despite the fact that home improvement demand has fared relatively well through 3Q22," wrote Credit Suisse analyst Karen Short in a research note Tuesday.

Short assumed coverage of Home Depot (ticker: HD) with a Neutral rating and a $335 price target, taking over from another analyst who had an Outperform rating on the stock and a $390 price target. She also initiated coverage of Lowe's Companies (LOW) at a Neutral rating and set a $210 price target.

Sharers of Home Depot fell 1.5% to $312.53 on Tuesday, while Lowe's stock lost 2% to $199.13.

Credit Suisse tracks 13 key metrics to understand the state of the housing and consumer backdrop, including monthly retail sales, median existing home prices, existing home sales, consumer confidence, and several housing indexes. Of those 13 indicators, only two were positive in the third quarter, while the other 11 pointed to negative growth. While this is consistent with trends seen in the first and second quarters of 2022, it's a marked shift from the same period last year, where a little over half were positive.

The analyst doesn't see the environment changing soon, given that interest rates are projected to keep rising, likely resulting in more dampening of housing prices.

Home prices have declined about 8% from their peak in June 2022, existing home sales are down about 24% in the third quarter, and mortgag e rates remain high compared with last year, Short points out. Coupled with a roughly 20% decline in the S&P 500, the deceleration in the housing market could pressure demand for home improvement projects, she added.

"Home improvement demand could slow down over the next year or longer—following significant growth over the past three years," Short wrote—and neither Home Depot nor Lowe's would be insulated from these industrywide headwinds.

In the long run, however, Short believes that the home improvement sector is "arguably one of the healthiest verticals in retail." She adds that both key players are poised to keep growing sales and rolling out innovative strategies to gain market share.

Last week, Cowen named Home Depot one of its top investment ideas for 2023 . Analyst Max Rakhlenko argued that investors were under-appreciating the benefits the company is deriving from its Pro sector, which could continue to perform well even amid a housing market downturn.