Although the S&P500 heading into another year with good numbers, for Marko Kolanovic of JPMorgan, the benchmark will falter in the coming months due to various headwinds.
He American stock index will decline to 4,200 by the end of the year, a drop of about 23% from Thursday’s close around 5,483, the bank’s chief market strategist and his team predicted in a mid-year outlook report.
The index surpassed the 5,500 point mark in early trading on Fridayafter a key indicator of US inflation showed signs of cooling.
What the JPMorgan report says
Kolanovic’s opinion reiterates the projection that has been maintained throughout the yeareven as other Wall Street analysts raised their forecasts to keep pace with the stock’s gains. JPMorgan’s target is the lowest among strategists tracked by Bloomberg. The average projection for the end of the year, of 5,317, implies a drop of approximately 3%.
“There is a clear disconnect between the enormous increase in US Stock Valuations and the Business Cycle”the strategists wrote, adding that the S&P 500’s 15% rise so far this year is not justified, given declining growth projections.
“There is a risk that in the coming quarters a situation opposite to the hopeful expectations will occur, in which growth will slow down.inflation remains firm and long-term rates do not fall sharply.”
JPMorgan: Risk of fall in banking stocks
JPMorgan strategists stand out among the Wall Street megabanks when pointing out the Risk of a major sell-off in US stocks. Peers at companies including Goldman Sachs Group Inc., Citi Group Inc. and Bank of America Corp. have steadily raised their targets for the S&P 500 this year. And Mike Wilson, a Morgan Stanley strategist, who last year agreed with Kolanovic in his bearish predictions, stopped issuing these types of warnings.
Kolanovic has been wrong before, such as when he was bullish on 2022 and the S&P 500 fell 19%, or held a bearish view on 2023 and the benchmark index soared 24%. He now views the optimism around stocks with skepticism, saying that Major economic indicators are stagnating and consumers are showing signs of distress.
Furthermore, according to Kolanovic, the Federal Reserve could make fewer rate cuts than the market expectswhich would put further pressure on the economy and stock valuations in the second half of the year.
As of Thursday, the S&P 500 had hit 31 record closes this year. One key driver has been enthusiasm around artificial intelligence, which has driven gains in the market’s biggest stocks.
Kolanovic recommends investors diversify increasing exposure to defensive “anti-momentum” stocks such as public services, basic consumer goods, health and dividends.
“Underestimated” resilience in technology companies
He acknowledged that he “underestimated the resilience” of mega-cap tech companies in terms of price momentum and earnings growth. But he warned that the degree of accumulation in those stocks and the concentration of market leadership are in “extremes of several decades.”
Without the influence of the 20 largest stocks in the index, the S&P 500 would be around the 4,700 level, JPMorgan estimates. Strategists say earnings forecasts would need to be revised upward for the group’s strength to continue, something they consider a “challenge.” Wall Street analysts expect revise their estimates downwards after the second quarter results.
“Although it is difficult calculate the timing of trend changes and rotations, we are among those who believe that hyperbolic movements in prices and sentiment are violently corrected more often than less when exuberance runs its course and the largest institutional investors are done chasing them,” Kolanovic said.
Source: Ambito
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