The decline in US stocks over the past three weeks marked the beginning of a sell-off that is likely to deepen alongside rising macroeconomic risks, including rising Treasury yields, a strong dollar and rising oil prices, says Marko Kolanovic of JPMorgan Chase & Co. . .
While US corporate earnings results this week may temporarily stabilize the market, that does not mean stocks are out of the woods, the bank’s chief market strategist said.
Complacency with stock valuations, inflation remaining too high, waning expectations of imminent interest rate cuts by the Fed, and overly rosy earnings forecasts are among the forces that Kolanovic says are adding to downside risks.
“The correction is likely to continue further,” he wrote Monday in a note to clients after the S&P 500 finished last week more than 5% below its March 28 closing high. A market correction is generally defined as a decline of 10% or more. “Market concentration has been too high, and positions have been extended, which are usually red flags, at risk of reversal.”
US stocks rose on Monday, with the S&P 500 rising 0.9%, ahead of a busy week for earnings. Scores are due from approximately 180 index members, representing more than 40% of the index’s market capitalization.
Microsoft Corp., Alphabet Inc., the parent company of Google, and Meta Platforms Inc. And Tesla Inc. Among the biggest names scheduled to report. The rebound comes after the group sent the tech-heavy Nasdaq 100 index to its biggest weekly loss in 17 months amid investor concerns that the Federal Reserve will keep interest rates high for longer.
For Kolanovic, recent trading patterns and the current market narrative parallel those of last summer, when bullish inflation surprises and hawkish Federal Reserve reviews sent risk assets tumbling. Except now, the investor situation looks even higher. The strategist recommends staying on the defensive, as the stock’s backdrop looks “problematic.” In his typical portfolio, the defensive approach includes hedging risky assets with long volatility and exposure to commodities, with the exception of gold.
Kolanovic and his team were among a small group of bearish contrarians on Wall Street this year. While most peers boosted their outlooks for US stocks, JPMorgan staff remained broadly averse to stocks and risky assets, with the lowest year-end target on the S&P 500 among major Wall Street banks. At 4,200, their forecast suggests a decline of about 16% from Monday’s level before the end of 2024.
The bank’s view on US stocks has failed to materialize for two years in a row as Kolanovic remained bullish throughout most of 2022 and then took a bearish stance during last year’s 24% rise in the S&P 500.
“The multiple expansions we’ve seen in recent months, extremely low volatility metrics until recently, the tightest credit spreads since 2007, and the general inability of market participants earlier in the year to identify any potential negative catalysts for stocks, are starting to take a toll on stocks,” Kolanovic said. the shift”. .
Separately, Kolanovic told clients on Monday that now is the time to consider buying Japanese consumption-linked stocks amid expectations that real wage growth will spur higher personal consumption in the country and boost consumer-focused stocks.
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