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Despite the optimism of many analysts who anticipate a resilient US economy and a conclusion to the Federal Reserve’s interest rate hikes, Dubravko Lakos-Bujas, Chief Global Equity Strategist at JPMorgan Chase & Co., offers a dissenting view. Lakos-Bujas, speaking in a recent interview in Sao Paulo, expresses skepticism about the prevailing market sentiment.
Contrary to the prevalent notion of a “Goldilocks” scenario, characterized by a gentle economic slowdown and Fed policy stability, Lakos-Bujas foresees risks for equities in 2024. He points to an anticipated economic deceleration, pressuring corporate earnings amid diminishing pricing power and jeopardized margins. Adding concerns about rich valuations, crowded positioning, and low volatility, he deems the current stock market setup “very vulnerable.”
In early trading, stocks experienced a 0.7% decline, with the S&P 500 posting its most significant drop in three weeks at 0.6% on Monday.
While concerns about higher interest rates have dominated investors’ worries, Lakos-Bujas notes that bets on rate cuts stem from lower growth expectations. He suggests that the optimism regarding lofty earnings expectations for the next year is at risk of downward revisions.
In preparation for what he envisions as an uncertain economic landscape in the coming year, Lakos-Bujas recommends a shift towards defensive stocks, particularly in the utilities sector. He sees this sector as an emerging “blue moon-type” opportunity that could serve as a hedge against a potential recession. In the event of a soft landing, these defensive stocks could still deliver satisfactory returns.
While many of JPMorgan’s peers predict fresh record highs for US stocks in the upcoming year, the bank diverges by maintaining a bearish outlook. JPMorgan anticipates US corporate earnings to grow between 2% to 3% next year, falling below the consensus estimate. The bank also flags concerns that expectations might be overly optimistic, particularly as the VIX, the equity “fear gauge,” trades near three-year lows.
In light of the prevailing bullish sentiment, Lakos-Bujas acknowledges that JPMorgan might be among the minority adopting a more cautious stance, stating, “Almost everybody is bullish. So I don’t know. Maybe we’re the lone crazy people.”
