The decline in U.S. stocks over the past three weeks was the beginning of a sell-off that’s prone to intensify together with increasing macroeconomic risks, including rising Treasury yields, a robust dollar and elevated oil prices, says Marko Kolanovic of JPMorgan Chase & Co.
While Corporate America’s earnings results this week could also be temporary stabilize the marketThat does not imply the stocks are out of the woods, said the bank’s chief market strategist.
Complacency with equity valuations, persistently high inflation, muted expectations of impending rate of interest cuts by the Federal Reserve and a very rosy earnings outlook are among the many aspects increasing downside risks, in response to Kolanovic.
“The correction is likely to continue,” he wrote in a note to clients on Monday, after the S&P 500 index ended last week greater than 5% below its March 28 closing high. A market correction is usually defined as a decline of 10% or more. “Market concentration was very high and positioning was expanded, which is usually a warning signal and at risk of reversal.”
U.S. stocks rebounded on Monday, with the S&P 500 gaining 0.9% ahead of a busy week of earnings. Results can be found from around 180 index members, accounting for greater than 40% of its market capitalization.
Microsoft Corp., Google parent Alphabet Inc., Meta Platforms Inc. and Tesla Inc. are amongst the largest names set to report. The rebound got here after the group sent the tech-heavy Nasdaq 100 Index to its biggest weekly loss in 17 months as investors feared the Fed will keep rates of interest high for longer.
For Kolanovic, recent trading patterns and the present market narrative are much like last summer, when surprising upward inflation and hawkish Fed revisions led to a decline in dangerous assets. However, investors’ positioning appears to be higher now. The strategist recommends remaining defensive because the equity environment appears “problematic.” In its model portfolio, a defensive approach includes hedging dangerous assets with long volatility and commodity exposure, excluding gold.
Kolanovic and his team were amongst a small group of pessimistic contrarians on Wall Street this 12 months. While most of its peers raised their U.S. equity outlook, the JPMorgan crew remained broadly averse to stocks and risk assets, with the S&P 500 year-end goal the bottom amongst major Wall Street banks. At 4,200, their forecast implies a decline of about 16% from Monday’s level before the top of 2024.
The bank’s house view on U.S. stocks hasn’t panned out for 2 straight years, as Kolanovic remained bullish through most of 2022’s slide after which turned bearish throughout the S&P 500’s 24% rally last 12 months.
“The multiple expansion observed in recent months, the extremely low volatility metrics until recently, the tightest credit spreads since 2007 and the general inability of market participants at the beginning of the year to identify potential negative catalysts for stocks are starting to shift,” Kolanovic said.
Separately, Kolanovic told clients on Monday that it’s time to take into consideration buying Japanese consumption-related stocks, as real wage growth is predicted to spice up personal consumption within the country and boost consumer-focused stocks.
