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According to JPMorgan, the S&P 500 could fall 10% to 4,800 points in the summer months.
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The bank highlighted three catalysts that could cause a decline.
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The May jobs report could trigger a bearish narrative shift in the stock market.
According to JPMorgan, a 10% stock market sell-off is possible this summer after a huge rally this year.
The bank’s trading desk said in a recent note that the S&P 500 could test the 5,000 level as support and possibly fall below with a decline of as much as 10%. That would bring the index to about 4,800.
According to the trading desk, there are three major catalysts that could trigger such a sell-off.
“Buyer Exhaustion”
The recent performance of stocks during earnings season suggests that potential stock buyers are becoming exhausted.
The bank highlighted that companies that beat first-quarter earnings estimates underperformed the S&P 500, while companies that missed expectations were punished.
“The combination of earnings season stock performance and declining market breadth suggests a market needs a new set of catalysts and/or reassurance about the prevailing market narrative,” JPMorgan said.
That means only in-line macro data and a cautious Fed can push investors to the sidelines come second-quarter earnings, which start in mid-July.
“Momentum unwind”
Most of the stock market’s recent gains have been driven by momentum, with technology stocks leading the way.
However, if momentum falters, there could be a bigger unwind that drives stock prices lower.
“The key to watch is the short-term trajectory of the momentum. If that falters, it would trigger a bigger degrossing as part of that momentum. That chain reaction could lead to a 5% to 10% pullback,” he said JPMorgan.
“Disappointment macro data”
The reemergence of a stagflation or recession story would dash hopes of a soft landing in the economy and likely send stock prices tumbling.
That narrative shift could happen Friday with the May jobs report.
JPMorgan said a jobs report below 50,000 to 75,000 or above 250,000 to 300,000 could trigger a narrative shift and hurt stock prices.
Economists’ current estimates say about 190,000 jobs were added to the economy in May.
Read the original article on Business Insider