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Stocks skyrocketed to start off 2019 but the rally may lose some steam as the S&P 500 approaches a near-term top, according to J.P. Morgan.
Adam Crisafulli, an executive director at the bank, said in a note to clients Monday that the S&P 500 consensus earnings estimate for 2020 ticked down to about $181 to $182 per share in recent weeks from about $185.
This earnings estimate gets the S&P 500 to about 2,900 "and that should be thought of as a ceiling for the time being," he said. "It's not clear if improved growth will simply stabilize [the earnings estimate] at these levels or push it back up by a few dollars."
Earnings growth expectations have fallen amid worries that a potential economic slowdown, along with a prolonged trade dispute between China and the U.S., could hurt corporate profits.
Recently, the spread between the 10-year Treasury note and its 3-month counterpart turned negative, creating a yield-curve inversion. This is seen by investors as signal that a recession may be on the horizon. Meanwhile, negotiations between China and the U.S. on trade continue.
However, concerns over the economy led the Federal Reserve to shift to a more accommodative monetary policy stance to start off 2019, which should be stimulative for stocks. On the trade front, both sides say progress is being made on key issues such as forced technology transfers.
The economic data is also improving. Manufacturing activity in China reached in March its strongest level in eight months. In the U.S., it rebounded from its lowest level since November 2016.
The benchmark 10-year yield rose to 2.47 percent following the data releases, from about 2.41 percent in the previous session.
"If investors recapture just some of the economic optimism from Jan and Feb about global growth inflecting higher exiting [calendar first quarter] and continuing into [calendar second quarter] … it will be extremely beneficial to stocks in the near-term and should significantly undercut the recent bond rally," Crisafulli said. "If bonds see sustained selling, this will bolster financial equities (and cyclicals more broadly) in the days and weeks ahead."
Crisafulli also said that, if the 2020 S&P 500 earnings consensus rises back to about $185 per share, the broad index could reach a record high of 3,145.
However, an "irresponsibly dovish" Fed — meaning "the Fed doesn't repivot back towards a neutral or hawkish policy bias if global economic risks diminish and growth improves" —would also be needed for the index's earnings multiple to expand to 17 from the current level of 16, he said.