Marko Kolanovic of JPMorgan Chase & Co. suggests that the upcoming week will be pivotal in determining the sustainability of stock valuations, particularly for Big Tech companies. With earnings reports from major tech giants like Apple, Microsoft, and Alphabet expected, investors are closely watching for signs of whether current valuations are justified, especially amid anticipation of interest rate cuts. Kolanovic also emphasizes the importance of monitoring inflation risks and the divergence between Chinese and developed market stocks.
According to Marko Kolanovic of JPMorgan Chase & Co., the upcoming week holds significant importance in assessing the sustainability of stock valuations, particularly within the realm of Big Tech companies. As investors await earnings reports from industry giants such as Apple, Microsoft, and Alphabet, attention is focused on whether current valuations are justified amidst expectations of interest rate cuts.
Kolanovic, in a note to clients on Monday, underscored the crucial role of tech earnings in shaping market sentiment. With these companies collectively commanding a market value of over $10 trillion, their performance will provide valuable insights into the broader market landscape. Notably, these megacap tech firms, along with other growth leaders like Amazon, Nvidia, Meta Platforms, and Tesla, carry a substantial premium compared to the broader market in terms of forward price-to-earnings ratios.
The strategist highlighted the dominance of tech-driven gains in the market over the past year, emphasizing the significance of these companies in driving overall market performance. However, Kolanovic also cautioned about the potential risks associated with such concentration, particularly in light of diverging expectations regarding interest rate policy between investors and Federal Reserve officials.
While expressing a preference for quality growth over cyclical value, Kolanovic maintained a positive outlook on the US market compared to the euro zone. He anticipates the Fed to initiate rate cuts starting in June, with subsequent cuts expected at each meeting throughout the year.
Addressing inflation concerns, Kolanovic warned that core inflation may surpass market expectations in the first half of 2024, potentially leading to market volatility and corrections in both equities and credit markets. Despite the recent rally in both asset classes, he cautioned against complacency, urging investors to remain vigilant about inflationary pressures.
In assessing market sentiment, Kolanovic noted a shift in expectations regarding the timing of interest rate cuts, with traders leaning towards a reduction in May rather than earlier in the quarter. JPMorgan recently adjusted its stance on Treasuries, trimming its overweight recommendation to counteract market speculation surrounding rate adjustments.
Additionally, Kolanovic highlighted the extreme divergence between Chinese stocks and those of developed markets, signaling potential market inefficiencies. While expressing optimism about the US equity market, he acknowledged past discrepancies between his outlook and actual market performance, underscoring the complexity of predicting market dynamics.
JPMorgan’s projection of the S&P 500 declining to 4,200 by the end of 2024 reflects a cautious stance compared to other Wall Street firms, highlighting lingering uncertainties and potential downside risks in the market.
