JPMorgan’s Kolanovic warns that the S&P 500 will fall 23% by the end of the year

(Bloomberg) — The S&P 500 may be headed for another record close, but JPMorgan Chase & Co.’s Marko Kolanovic says the benchmark will falter in the coming months amid growing headwinds from the slowdown. of the economy to downward revisions of corporate profits.

The U.S. stock index will decline to 4,200 by the end of the year, a drop of about 23% from Thursday’s close around 5,483, the bank’s chief market strategist and his team predicted Friday in a mid-year report on perspectives. The index surpassed the 5,500-point mark in early trading on Friday, after a key gauge of U.S. inflation showed signs of cooling.

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Kolanovic’s view reiterates the projection he has maintained all year, even as other Wall Street analysts raised their forecasts to keep pace with the stocks’ gains. JPMorgan’s target is the lowest among strategists tracked by Bloomberg. The average year-end projection of 5,317 implies a drop of about 3%.

“There is a clear disconnect between the massive rise in U.S. equity valuations and the economic cycle,” the strategists wrote, adding that the S&P 500’s 15% rise so far this year is unjustified given declining growth projections. “There is a risk that the opposite of hopeful expectations will play out in the coming quarters, with growth slowing, inflation remaining firm and long-term rates failing to decline sharply.”

JPMorgan strategists are prominent among Wall Street’s megabanks in signaling the risk of a big selloff in U.S. stocks. Their counterparts at firms including Goldman Sachs Group Inc., Citi Group Inc. and Bank of America Corp. have steadily raised their S&P 500 targets this year. And Morgan Stanley strategist Mike Wilson, who joined Kolanovic in his bearish predictions last year, has stopped issuing such warnings.

Kolanovic has been wrong on previous occasions, such as when he was bullish on 2022 and the S&P 500 fell 19%, or maintained a bearish view on 2023 and the benchmark index soared 24%. He now views the optimism around stocks with skepticism, as he says leading economic indicators are stalling and consumers are showing signs of distress.

Additionally, according to Kolanovic, the Federal Reserve could make fewer rate cuts than the market expects, which would put further pressure on the economy and stock valuations in the second half of the year.

As of Thursday, the S&P 500 had posted 31 closing records this year. One of the keys has been the enthusiasm around artificial intelligence, which has driven the rise of the largest stocks in the market.

Kolanovic recommends investors diversify by increasing exposure to defensive, “anti-momentum” stocks such as utilities, consumer staples, healthcare and dividends.

“Underrated” resilience

He acknowledged that he “underestimated the resilience” of mega-cap tech companies in terms of price momentum and earnings growth. But he warned that the degree of accumulation in those stocks and the concentration of market leadership are at “multi-decade extremes.”

Without the influence of the 20 largest stocks in the index, the S&P 500 would be around the 4,700 level, JPMorgan estimates. Strategists say earnings forecasts would need to be revised up for continued strength in the group, which they consider a “challenge.” They expect Wall Street analysts to revise down their estimates after second-quarter results.

“While it is difficult to time trend reversals and rotations, we are of the view that hyperbolic moves in price and sentiment correct violently more often than not when exuberance runs its course and larger institutional investors are done chasing them,” Kolanovic said.

Translated by Paulina Munita.

Original Note: JPMorgan’s Kolanovic Warns S&P 500 Will Plummet 23% by Year-End