JPMorgan Predicts S&P 500 Slump, Defying Wall Street OptimismJPMorgan Predicts S&P 500 Slump, Defying Wall Street Optimism Despite the S&P 500 Index’s recent ascent, JPMorgan Chase & Co.’s chief strategist, Marko Kolanovic, has cast doubt on its continued upward trajectory. In a mid-year outlook, Kolanovic and his team projected a significant decline for the benchmark index, predicting a drop of approximately 23% to 4,200 by year-end. Kolanovic’s assessment contradicts the generally optimistic sentiment prevailing among Wall Street forecasters. His target is noticeably lower than the average year-end estimate of 5,317, which implies a modest decline of around 3%. The strategists attributed their bearish outlook to mounting economic headwinds, including a slowing economy and downward revisions to earnings expectations. They emphasized the disconnect between the recent surge in equity valuations and the underlying business cycle, which they believe is warranting a correction. Kolanovic’s team stands out from other Wall Street megabanks by acknowledging the potential for a major sell-off in U.S. stocks. While peers from Goldman Sachs, Citigroup, and Bank of America have raised their S&P 500 targets, Kolanovic has consistently maintained a pessimistic view, even during periods of market optimism. Despite being wrong in his earlier predictions for 2022 and 2023, Kolanovic remains skeptical of the current stock market enthusiasm. He points to flat economic indicators and signs of consumer distress as evidence of potential setbacks. Kolanovic also anticipates that the Federal Reserve’s interest rate cuts may fall short of market expectations, further pressuring the economy and stock valuations in the second half of the year. While the S&P 500 has set multiple closing records this year, Kolanovic advises investors to diversify by increasing their exposure to “anti-momentum” defensive value plays such as utilities, consumer staples, healthcare, and dividend stocks. He acknowledges the resilience of mega-cap technology companies but warns that the concentration of market leadership and massive inflows into these stocks have reached extreme levels. Kolanovic believes that the hyperbolic moves in price and sentiment are unsustainable and predicts sharp corrections once exuberance subsides and institutional investors complete their chasing phase.
(Bloomberg) – The S&P 500 Index may be headed for a new record, but JPMorgan Chase & Co.’s Marko Kolanovic says the benchmark will falter in the coming months amid mounting headwinds, from a slowing economy to downward earnings revisions.
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U.S. stocks are expected to fall to 4,200 by year-end, a drop of about 23% from Thursday’s close of around 5,483, the bank’s chief strategist and his team said in a mid-year outlook on Friday. It broke through the 5,500 mark in early trading on Friday after a key gauge of U.S. inflation showed signs of cooling.
Kolanovic’s view reiterates the call he’s been sticking to all year, even as other Wall Street forecasters have upgraded their forecasts to keep pace with the rise in stock prices. JPMorgan’s target is the lowest among the strategists Bloomberg tracks. The average year-end forecast of 5,317 implies a decline of approximately 3%.
“There is a clear disconnect between the dramatic rise in U.S. equity valuations and the business cycle,” the strategists wrote, adding that the S&P 500’s 15% gain this year is unwarranted given declining growth forecasts. “The risk is that the opposite of the hopeful expectations will play out in the coming quarters, with growth slowing, inflation remaining firm and long-term interest rates failing to fall sharply.”
JPMorgan’s strategists differentiate themselves from Wall Street’s megabanks by identifying the risk of a major sell-off in U.S. stocks. Colleagues from companies such as Goldman Sachs Group Inc. Citigroup Inc. and Bank of America Corp. have steadily raised their S&P 500 targets this year. And Morgan Stanley strategist Mike Wilson, who stood alongside Kolanovic in his bearish calls last year, has stopped issuing such warnings.
Kolanovic has been wrong before, remaining bullish in 2022 as the S&P 500 fell 19% and maintaining a pessimistic view in 2023 as the benchmark rose 24%. He now views optimism around stocks with skepticism, saying key economic indicators are flat and consumers are showing signs of distress.
In addition, the Federal Reserve may cut rates less than the market expects, putting further pressure on the economy and stock valuations in the second half of the year, Kolanovic said.
The S&P 500 has already set 31 closing records this year through Thursday. A key to this is the excitement around artificial intelligence, which has led to outsized gains for the market’s biggest stocks.
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Kolanovic advises investors to diversify by increasing exposure to “anti-momentum” defensive value plays such as utilities, consumer staples, healthcare and dividend stocks.
‘Undervalued’ resilience
He acknowledged that he underestimated “the resilience” of mega-cap technology companies in terms of share price momentum and earnings growth. But he warned that the level of massive inflows into these stocks and the concentration of market leadership are at “multi-decade extremes.”
Without the influence of the twenty largest stocks in the index, the S&P 500 would be around 4,700 points, JPMorgan estimates. The strategists say earnings expectations need to be revised upwards to continue the group’s strength, something they see as a “challenge”. They expect Wall Street analysts to lower their estimates after second-quarter results.
“While it is difficult to time reversals and rotations, we believe that hyperbolic moves in price and sentiment are more often than not corrected sharply, once exuberance has run its course and the largest institutional investors are done chasing,” Kolanovic said.
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