The diverging views between JPMorgan Chase’s Marko Kolanovic and Goldman Sachs’ David Kostin underscore a broader debate among Wall Street strategists regarding the recent surge in major U.S. stock indices. Kolanovic, JPMorgan’s chief strategist, warns of potential bubble formation, citing the significant rise in U.S. stocks and bitcoin’s climb to nearly $70,000 as red flags. He sees these developments as signs of excesses in the market, reminiscent of past bubbles like the dot-com boom of the late 1990s and the meme stock frenzy of early 2021. Conversely, Kostin from Goldman Sachs argues that the bullish sentiment is justified, pointing to solid fundamentals supporting the high valuations of major tech companies. Despite reaching new highs, particularly driven by gains in large American tech firms, the S&P 500’s ascent faces skepticism from critics questioning its sustainability and optimism from those anticipating further gains. Kolanovic aligns with the former group, highlighting the market’s advance with low volatility and accumulating excesses. He notes that stocks have continued to rise despite increasing bond yields and diminishing expectations for interest rate cuts. Moreover, Kolanovic suggests that investors may be overly optimistic about economic acceleration, despite declining earnings projections for 2024, indicating potential complacency about the market cycle.
In contrast to Kolanovic’s cautious stance, Kostin from Goldman Sachs offers a more optimistic perspective, suggesting that “this time is different.” Unlike previous periods characterized by abrupt stock price movements, often exceeding their underlying value, Kostin argues that the current market’s breadth of “extreme valuations” is more contained, with fewer stocks trading at such multiples compared to the peak in 2021.
Moreover, Kostin points out that investors are primarily paying high valuations for the largest growth stocks in the index, as opposed to the “growth at any cost” mentality prevalent in 2021. He believes that the valuation of the ‘Magnificent 7,’ including companies like Nvidia, Meta Platforms, and Microsoft, is supported by their strong fundamentals. These companies have led the market higher this year, contributing to the string of 15 closing highs in the S&P 500 and four consecutive months of gains.
The latest financial results for these companies seem to validate their stock price movements, with earnings per share for the group collectively surpassing expectations, up 59% year-over-year compared to an anticipated 47%, according to data compiled by Bloomberg Intelligence.
However, Kolanovic remains skeptical, viewing the current market environment as a puzzle reflecting investor complacency and an underestimation of risk. He warns that the continued stock rally could prolong monetary policy tightening, as premature rate cuts might further inflate asset prices or trigger another surge in inflation.