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


(Bloomberg) — The S&P 500 Index may be headed for another record closing high, but JPMorgan Chase & Co.’s Marko Kolanovic says the benchmark will falter in coming months in the face of mounting headwinds, from a slowing economy to downward earnings revisions.

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The US equity guage is poised to plunge to 4,200 by year-end, a roughly 23% drop from Thursday’s close around 5,483, the bank’s chief market strategist and his team said Friday in a mid-year outlook. It surpassed the 5,500 mark in early trading Friday after a key measure of US inflation showed signs of cooling.

Kolanovic’s view reiterates the call he’s stuck to all year, even as other Wall Street forecasters upgraded their predictions to keep up with the surge in stocks. JPMorgan’s target is the lowest among strategists tracked by Bloomberg. The average year-end projection, of 5,317, implies a roughly 3% drop.

“There is a clear disconnect in the huge run-up in US equity valuations and the business cycle,” the strategists wrote, adding that the S&P 500’s 15% year-to-date gain isn’t justified, given waning growth projections. “There is a risk that an opposite of the hopeful expectation could play out in coming quarters where growth decelerates, inflation remains firm, and long-term rates don’t move sharply lower.”

JPMorgan’s strategists stand out among Wall Street’s megabanks in flagging the risk of a big US stock selloff. Peers at firms including Goldman Sachs Group Inc. Citigroup Inc. and Bank of America Corp. have steadily ratcheted up their S&P 500 targets this year. And Morgan Stanley strategist Mike Wilson, who last year stood alongside Kolanovic in his bearish calls, has stopped issuing such warnings.

Kolanovic has been wrong before, staying bullish in 2022 as the S&P 500 tumbled 19% and sticking with a bearish view in 2023 as the benchmark soared 24%. He views the optimism around stocks with skepticism now as he says key economic indicators are stalling and consumers are showing signs of distress.

What’s more, the Federal Reserve may deliver fewer interest-rate cuts than the market expects, further pressuring the economy and stock valuations in the second half of the year, Kolanovic said.

The S&P 500 has already notched 31 closing records this year through Thursday. A key to that has been excitement around artificial intelligence, which has spurred outsized gains for the market’s largest stocks.

Kolanovic recommends that investors diversify by boosting exposure to “anti-momentum” defensive value plays like utilities, consumer staples, health care and dividend stocks.

‘Underappreciated’ Resiliency

He acknowledged that he “underappreciated the resiliency” of megacap tech companies in terms of price momentum and earnings growth. But he warned that the degree of crowding into those stocks and the concentration of market leadership are at “multi-decade extremes.”

Without the sway of the 20 largest stocks in the index, the S&P 500 would be around the 4,700 level, JPMorgan estimates. The strategists say earnings forecasts would need to be revised higher for the group’s strength to continue, something they view as a “challenge.” They expect Wall Street analysts will revise their estimates down after second-quarter results.

“While timing reversals and rotations is difficult, we are in the camp that hyperbolic moves in price and sentiment are more often violently corrected than not when the exuberance runs its course, and the largest institutional investors are done chasing,” Kolanovic said.

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