Finance

JPMorgan warns stock market sell-off has ‘further to go’

Published

2 months ago

April 23, 2024

JPMorgan warns stock market sell-off has 'further to go'

Stocks recovered from their recent slump on Monday, but some bearish Wall Street strategists still see concerns that won’t go away anytime soon for investors.

With expectations that the Federal Reserve will cut rates waning, signs of inflation remaining persistent and stocks still trading at above-average valuations, many believe the market is in a similar position to when it entered a three-month downturn. the late summer and fall of 2023.

“Price action may depend on earnings numbers and could stabilize in the near term,” JPMorgan chief market strategist Marko Kolanovic wrote in a note on Monday. “Beyond this, however, we think the sell-off should continue. We remain concerned about continued complacency in equity valuations, inflation remaining too high, further Fed rate hikes and the earnings outlook that the implied acceleration could also lead to this year. optimistic.”

“The current market story and patterns are increasingly resembling last summer, when upward inflation surprises and aggressive Fed revisions drove a correction in risky assets, but investor positioning now appears to be higher.”

In late summer 2023, markets became increasingly pessimistic about the Fed’s rate cut. Investors interpreted Chairman Jerome Powell’s comments at the Fed meeting last September as a sign that the central bank would likely keep rates higher for longer than many had hoped. This weighed on stocks over the next month as bond yields soared.

At the time, Fed officials were still debating more rate hikes as economic data continued to come in hotter than expected. Although no rate hikes have been proposed this time, more and more economists have floated the idea that better-than-expected growth in the economy could keep the Fed from cutting rates at all this year.

This has caused a well-known reaction in the markets. As investors have scaled back their bets on rate cuts — with the consensus moving from an expectation of as many as seven cuts this year in January to fewer than two cuts now — bond yields have surged higher and stocks have suffered their worst decline of the year.

Julian Emanuel, who leads Evercore ISI’s equities, derivatives and quant strategy, recently told Yahoo Finance that the current market action is reminiscent of what preceded last year’s pullback.

Emanuel has been keeping a close eye on two-year Treasury yields, which a week ago topped 5% for the first time since November 2023 – a crucial level for investor sentiment. The shares were then sold. The yield on two-year government bonds closed at almost 4.97% on Monday.

According to Emanuel, the increase in interest rates on two-year government bonds is worrying, because shares were trading higher on the ‘implied promise’ of three Fed rate cuts this year.

“And if you look at March, I think it’s far more than a coincidence that the market literally came back off the highs just as the market started pricing in less than the three promised cuts,” Emanuel said.

Morgan Stanley Chief Investment Officer Mike Wilson wrote in a research note on Sunday that with 10-year Treasury yields (^TNX) now well above the critical level of 4.35% to 4.40%, higher yields could weigh on stock valuations in the future.

“If yields remain at current levels over the next three months, interest rates could see a ~5% decline within that period, all else being equal (which would equate to 4700-4800 on the S&P 500)” , Wilson wrote.

Wilson noted that with higher returns, any increase from here on out will have to be “largely earned through earnings increases rather than multiple expansion.”

Meta (META), Microsoft (MSFT), Alphabet (GOOGL, GOOG), Tesla (TSLA) and Chipotle (CMG) are set to report earnings this week in a busy week for S&P 500 reporting.