The slide in US equities over the previous three weeks was the beginning of a selloff that’s prone to deepen together with mounting macroeconomic dangers, together with rising Treasury yields, a robust greenback and elevated oil costs, says JPMorgan Chase & Co.’s Marko Kolanovic.
Whereas earnings outcomes from Company America this week could quickly stabilize the market, it doesn’t imply shares are out of the woods, the financial institution’s chief market strategist mentioned.
Complacency round fairness valuations, inflation staying too scorching, dimming expectations for imminent Federal Reserve interest-rate cuts and an excessively rosy revenue outlook are amongst forces Kolanovic says are including to draw back dangers.
“The correction likely has further to go,” he wrote Monday in a observe to purchasers after the S&P 500 Index ended final week greater than 5% beneath its March 28 closing excessive. A market correction is usually outlined as a decline of 10% or better. “Market concentration has been very high, and positioning extended, which are typically red flags, at risk of a reversal.”
US shares rallied Monday, with the S&P 500 gaining 0.9%, forward of a busy week of earnings. Outcomes are due from round 180 members of the index, representing greater than 40% of its market capitalization.
Microsoft Corp., Google guardian Alphabet Inc., Meta Platforms Inc. and Tesla Inc. are among the many greatest names set to report. The rebound comes after the group despatched the technology-heavy Nasdaq 100 Index to its greatest weekly loss in 17 months amid investor issues that the Fed will maintain charges greater for longer.
To Kolanovic, current buying and selling patterns and the present market narrative parallel these of final summer season, when upside inflation surprises and hawkish Fed revisions spurred a drop in threat belongings. Besides now investor positioning seems extra elevated. The strategist recommends staying defensive, with the equities backdrop wanting “problematic.” In his mannequin portfolio a defensive method includes hedging threat belongings with lengthy volatility and commodity publicity, excluding gold.
Kolanovic and his group have been amongst a small group of bearish contrarians on Wall Avenue this yr. As most of their friends boosted their US fairness outlooks, the JPMorgan crew remained averse to shares and threat belongings broadly, with the bottom S&P 500 year-end goal among the many large Wall Avenue banks. At 4,200, their forecast implies a roughly 16% drop from Monday’s degree earlier than 2024 ends.
The financial institution’s home view on US equities has didn’t materialize for 2 consecutive years as Kolanovic remained bullish all through a lot of 2022’s rout after which held a bearish stance throughout final yr’s 24% rally within the S&P 500.
“The multiple expansion seen in past months, extremely low volatility metrics up to recently, tightest credit spreads since 2007, and the general inability by market participants earlier in the year to identify any potential negative catalysts for stocks are starting to shift,” Kolanovic mentioned.
Individually on Monday, Kolanovic informed purchasers it’s time to think about shopping for Japanese consumption-related shares on expectations actual wage development will spur greater private consumption within the nation and increase consumer-focused shares.
