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JPMorgan warns of a growing gap between sustained stock gains and delayed rate cuts

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  • The growing gap between soaring stock prices and continued Fed pressure for rate cuts should raise concerns, JPMorgan says.

  • Expectations for a rate cut have fallen to 80 basis points, reminiscent of last October’s stock market downturn.

  • Analysts highlighted expected market growth in the second half of the year, but cautioned against assuming this will boost 2025 earnings expectations.

The fact that stocks continue to set new records amid signs of delayed rate cuts is cause for concern, JPMorgan says.

In research sent to clients on Tuesday, JPMorgan’s Mislav Matejka and his team noted that shares have risen 30% since their lows last October, largely fueled by expectations of a March interest rate cut. Three months later, however, these projections have been moved forward significantly.

A closer look revealed that Wall Street had initially priced in an 80 basis point rate cut by the Fed during the October downturn. As the market rose, expectations were revised down to 180 basis points in January, at the height of the easing. Now those predictions have been recalibrated to 80 bps.

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“Stocks are ignoring the latest pivot of a pivot, which could be a mistake,” analysts wrote in the note, adding that corporate earnings will have to accelerate to close the gap.

Fed funds futures vs. S&P 500Fed funds futures vs. S&P 500

Fed funds futures vs. S&P 500Bloomberg Finance LP

JPMorgan also expects bond yields to move south in the second half of the year, but there is also a rebound in inflation swaps – which could further delay a rate cut. Combined with lower-than-expected bond yields again, this signals “a lot of complacency in the bond market regarding inflation risk.”

The AI-powered tech stocks have driven the S&P 500 to waves of rallies in 2024. Meanwhile, rising inflation has prompted the Fed to raise expectations for a first rate cut from March to June. Despite this, some analysts predicted less than a 50% chance of a rate cut in June due to the latest inflation indexes.

Matejka’s team further pointed out that the market is believed to grow in the second half of the year, but this does not mean that earnings expectations for 2025 will increase.

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Moreover, they highlighted the market’s alarming complacency regarding downside risks, with recession probabilities only at the seventh percentile, which is likely underestimated. Furthermore, the rise in cyclical and defensive stocks mirrors the levels seen during the recovery from the global financial crisis in 2009-2010, indicating potential overlocation.

“This is unlikely to be the model this time around, and it could create headwinds. The next time bond yields fall, we don’t believe the market will react as positively as it did in November and December; we could return to a more traditional correlation between returns and stocks,” the team added.

Read the original article on Business Insider

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