According to JPMorgan, three catalysts could trigger a 10% sell-off in the stock market this summer

• According to JPMorgan, the S&P 500 could fall 10% to 4,800 points in the summer months.

• The bank highlighted three catalysts that could cause a decline.

• The May jobs report could trigger a bearish narrative shift in the stock market.

A 10% sell-off in the stock market is possible this summer after a huge rally this year, according to JPMorgan.

The bank’s trading desk said in a recent note that the S&P500 could test the 5,000 level as support and possibly fall below with as much as a 10% decline. 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 narrative would dash hopes a soft landing in the economy and will likely cause stock prices to fall.

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.

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