(Bloomberg) — The S&P 500 Index may be headed for a new record high, but JPMorgan Chase & Co.’s Marko Kolanovic says the benchmark will falter in the coming months amid mounting headwinds, from a slowing economy to downward earnings revisions.
Most read from Bloomberg
The U.S. stock price is expected to fall to 4,200 by year-end, down about 23% from Thursday’s close around 5,483, the bank’s chief strategist and his team said in a mid-year outlook on Friday. It breached the 5,500 mark in early trading on Friday after a key measure of US inflation showed signs of cooling.
Kolanovic’s view reiterates the call he’s been sticking to all year, even as other Wall Street forecasters have upgraded their forecasts to keep pace with the rise in stock prices. JPMorgan’s target is the lowest among strategists Bloomberg tracks. The average year-end projection of 5,317 implies a decline of about 3%.
“There is a clear disconnect between the massive increase in US stock valuations and the business cycle,” the strategists wrote, adding that the S&P 500’s 15% year-to-date gain is not justified given declining growth forecasts. “There is a risk that the opposite of hopeful expectations could play out in the coming quarters, with growth slowing, inflation remaining firm and long-term interest rates not falling sharply.”
JPMorgan’s strategists stand out from Wall Street’s megabanks in identifying the risk of a major selloff in U.S. stocks. Colleagues from companies such as Goldman Sachs Group Inc. Citigroup Inc. and Bank of America Corp. have steadily increased their S&P 500 targets this year. And Morgan Stanley strategist Mike Wilson, who stood alongside Kolanovic in his bearish calls last year, has stopped issuing such warnings.
Kolanovic has been wrong before, remaining optimistic in 2022 when the S&P 500 fell 19% and sticking to a pessimistic view in 2023 when the benchmark rose 24%. He now views the optimism surrounding stocks with skepticism, as he says key economic indicators are stagnant and consumers are showing signs of distress.
In addition, the Federal Reserve may make fewer interest rate cuts than the market expects, putting further pressure on the economy and stock valuations in the second half of the year, Kolanovic said.
The S&P 500 has already set 31 closing records this year through Thursday. A key to this has been the excitement around artificial intelligence, which has led to outsized gains for the market’s biggest stocks.
Kolanovic recommends investors diversify by increasing exposure to “anti-momentum” defensive value players such as utilities, consumer staples, healthcare and dividend stocks.
‘Undervalued’ resilience
He acknowledged that he underestimated “the resilience” of mega-cap technology companies in terms of share price momentum and earnings growth. But he warned that the level of mass inflows into these stocks and the concentration of market leadership are at “multi-decade extremes.”
Without the influence of the twenty largest stocks in the index, the S&P 500 would be around 4,700 points, JPMorgan estimates. The strategists say earnings forecasts need to be revised higher to continue the group’s strength, something they see as a “challenge.” They expect Wall Street analysts to lower their estimates after the second quarter results.
“While it is difficult to time reversals and rotations, we believe that hyperbolic moves in price and sentiment are corrected sharply more often than not, when exuberance runs its course and the largest institutional investors are done chasing,” Kolanovic said.
Most read from Bloomberg Businessweek
©2024 Bloomberg LP
