JPMorgan is staying steadfastly bearish, saying market ignoring substantial risks

Published Tue, Mar 12 20241:02 PM EDT

JPMorgan is sticking to its bearish thesis amid a more optimistic outlook on Wall Street, saying investors are ignoring key market risks. "Markets are priced for perfection as valuations are rich, and extreme crowding in momentum stocks risks a sharp correction in this factor," Marko Kolanovic, chief market strategist at the firm, wrote in a Monday note. "Additionally, we believe that markets are ignoring the substantial geopolitical and political risks given their apparent lack of immediacy, and that inflation risks are skewed to the upside, which could keep central banks' target rates higher for longer," he added. The strategist said he remains underweight equities and overweight cash. The Wall Street firm is an outlier among the major banks when it comes to year-end forecasts. As of Monday's close, JPMorgan expects the S & P 500 will tumble more than 17% to its 2024 target of 4,200, according to CNBC's market strategist survey . On average, strategists expect the broader index will end the year around 5,032, or somewhat lower than where it is of late. JPMorgan has stuck to its bearish outlook even as this year's rally had the S & P 500 shooting past many targets on Wall Street, driving other strategists to raise their forecasts. Last month, Goldman Sachs' David Kostin raised his year-end target to 5,200, up from 4,700 originally , citing an "improved earnings outlook." This month, Bank of America's Savita Subramanian raised her year-end target to 5,400 from 5,000, making the strategist one of the biggest bulls on Wall Street. But Kolanovic said he expects the market rally is showing "early signs of exhaustion," meaning the outlook for stocks could be to the downside after its momentum this year. The S & P 500 has repeatedly notched all-time highs on the back of the artificial intelligence trade. The strategist said investors continue to underestimate significant — and growing risks. Geopolitically, he pointed to the two ongoing wars in Gaza and Ukraine, a shift toward a multipolar world order, as well as an election year for many countries that could raise volatility around the globe. Inflation is another risk as the challenges of getting back to the Federal Reserve's 2% target could raise the risk of higher-for-longer interest rates, Kolanovic said. For the moment, markets are pricing in the start of rate cuts in June. On Tuesday, the February consumer price index showed inflation rising about as expected, though it also demonstrated the final stretch toward the Fed's inflation target could be the most difficult. Meanwhile, Nvidia is growing point of concern for investors. The AI beneficiary, which has been a major driver for the S & P 500's gains this year, could drag the benchmark should it start to sell off. "NVDA has a causal relationship to S & P 500," Kolanovic wrote. "Given this relationship coupled with very bullish investor sentiment and positioning, we caution investors that this relationship is likely to work in reverse when the AI euphoria peaks."