JPMorgan equity strategists expressed concerns about the potential for an extended sell-off in the U.S. stock market, citing several factors that could impact investor sentiment and market stability. On Monday, the S&P 500 closed nearly 0.9% higher to regain the 5000 level.
As roughly 40% of U.S. companies by market capitalization prepare to report earnings this week, the bank suggested that the market's movements may hinge on these results, potentially leading to a stabilization in the near term.
However, JPMorgan warned of complacency in equity valuations, persistent inflation, potential for further Federal Reserve rate hikes, and an overly optimistic profit outlook for the year.
"The current market narrative and patterns are increasingly resembling those of last summer, when upside inflation surprises and hawkish Fed revisions drove a correction in risk assets, but investor positioning now appears more elevated," strategists wrote in a client note.
Accordingly, the USD strength, rising bond yields, elevated oil prices, and increased market concentration are contributing to a tense backdrop that could impact equity markets. JPMorgan highlighted a significant expansion in multiples, historically low volatility metrics, and the tightest credit spreads since 2007.
Moreover, market participants' earlier inability to pinpoint potential negative catalysts for stocks is beginning to shift. Concerns are growing about ongoing complacency in equity valuations, persistent inflationary pressures, potential further Federal Reserve policy adjustments, and rising interest rates potentially signaling deeper issues.
In contrast, Japan presents an intriguing opportunity, particularly in consumption-related stocks. The 2024 spring wage negotiations are expected to yield substantial increases, potentially driving real wage growth and boosting personal consumption.
This scenario could serve as a catalyst for Japanese stocks, especially those linked to consumer spending.
The report also touched on foreign exchange and commodities markets, noting that the strong U.S. dollar reflects fundamental factors and that foreign exchange carry trades are yielding returns.
In commodities, despite geopolitical events such as Iran's attack on Israel, oil markets have shown signs of complacency. JPMorgan anticipates that rallying base and precious metal prices have more room to grow through 2024, with geopolitics likely to remain a bullish factor.