JPMorgan’s equity strategists have raised red flags about the potential for an extended downturn in the U.S. stock market, citing a multitude of factors that could impact investor sentiment and market stability. Despite the S&P 500’s recent modest gain of nearly 0.9%, which allowed it to reclaim the psychologically significant 5000 level, the bank’s cautionary stance underscores the need for vigilance in the face of lingering uncertainties.
As approximately 40% of U.S. companies prepare to unveil their earnings reports this week, JPMorgan suggests that the market’s trajectory may pivot on these outcomes, potentially ushering in a period of short-term stabilization. However, the bank’s analysts have issued stark warnings regarding various challenges confronting the market. These include concerns about complacency in equity valuations, the persistent pressure of inflation, the possibility of further interest rate hikes by the Federal Reserve, and an overly optimistic outlook regarding corporate profits for the year ahead.
In a detailed client note, JPMorgan’s strategists draw parallels between the current market narrative and patterns observed during the tumultuous events of last summer. They note that during that time, unexpected inflationary upticks and more hawkish signals from the Federal Reserve triggered a correction in risk assets. While investor positioning appears more elevated currently, there are underlying worries about the potential ramifications of several factors such as the strength of the U.S. dollar, rising bond yields, elevated oil prices, and increased market concentration.
Moreover, the report highlights significant expansions in multiples, historically low volatility metrics, and the tightest credit spreads observed since 2007, all of which point to a tense backdrop that could influence equity markets. There’s also growing apprehension about market participants’ earlier inability to identify potential negative catalysts for stocks, leading to concerns about ongoing complacency in equity valuations and the potential fallout from rising interest rates.
In contrast to the challenges facing the U.S. market, Japan presents an intriguing opportunity, particularly in consumption-related stocks. Anticipated substantial increases in spring wage negotiations in 2024 are expected to drive real wage growth and subsequently boost personal consumption. This could serve as a significant catalyst for Japanese stocks, especially those tied to consumer spending.
The report also provides insights into foreign exchange and commodities markets. It notes that the strength of the U.S. dollar reflects fundamental factors and highlights the yield returns from foreign exchange carry trades. Additionally, despite geopolitical events such as Iran’s attack on Israel, oil markets have displayed signs of complacency. JPMorgan foresees further potential for growth in base and precious metal prices through 2024, with geopolitics likely to remain a bullish factor in these markets.
