This Content Is Only For Paid Member
JPMorgan’s chief global markets strategist, Marko Kolanovic, believes the recent stock market rally is about to lose momentum. Despite the S&P 500’s impressive 6% surge last week, representing its most robust weekly performance of the year, Kolanovic sees a convergence of concerns that could undermine this rally.
Kolanovic points out several factors contributing to his bearish outlook. He anticipates a return to an unattractive risk-reward profile for equities, as the Federal Reserve is expected to maintain higher interest rates for an extended period. Rich valuations, overly optimistic earnings expectations, dwindling pricing power, vulnerable profit margins, and the continued slowdown in top-line growth are all factors contributing to this outlook.
One particularly precarious aspect is the notion that bad economic news may be interpreted as good news for the stock market. Further economic deterioration could raise concerns of an impending recession, making it challenging to distinguish between a healthy economic slowdown and the initial stages of a recession.
Market expectations suggest that the Federal Reserve will keep rates unchanged until spring, with potential rate cuts priced in. The rationale behind any rate cut is crucial, as it can significantly impact the stock market. A rate cut driven by controlled inflation and a robust economy would be bullish for stocks. Conversely, a rate cut due to economic weakness would be bearish.
In the event that the Federal Reserve neither cuts nor raises interest rates and maintains them at current levels, this scenario could pose a more significant problem for the stock market. Such a stance could lead markets to price in a policy error, potentially resulting in lower long-term yields, which may not be beneficial for stocks, especially if earnings projections for 2024 are revised downward.
Kolanovic is not the only Wall Street bear, as Morgan Stanley’s Mike Wilson has also expressed concerns that the recent stock market rally is merely a bear market rally. Both strategists have consistently maintained a bearish stance toward stocks throughout the year, even amid strong stock market performance in 2023.
