JPMorgan analysts have raised concerns that the current equity market is increasingly a "two-sided debate," with risks stemming from potential growth downturns, uncertain Fed timing, and various geopolitical factors.
According to their analysis, the market is no longer characterized by a "one-way upside trade." Instead, it faces heightened risks due to "crowded positioning, rich valuation, and rising election and geopolitical uncertainties."
The bank explains that in the first half of the year, market attention was largely focused on the trajectory of inflation. However, the second half of the year is shifting attention to growth risks, particularly given the elevated earnings expectations for the latter half of 2024 (+9%) and for 2025 (+14%).
The analysts highlighted that extreme positioning and momentum crowding, which they had previously warned about, have historically led to "violent unwinds."
The current market pullback is seen as a reaction to fears of weakening growth and a reassessment of recession probabilities.
The analysts also pointed out that divergent central bank policies, particularly between the Federal Reserve and the Bank of Japan, have "further amplified market volatility," leading to significant disruptions across various asset classes.
They add that this has been marked by a record spike in the VIX, vanishing liquidity, and forced deleveraging by volatility-sensitive strategies.
JPMorgan's house view anticipates that the Federal Open Market Committee (FOMC) will begin cutting rates, with a 50-basis-point reduction expected at both the September and November meetings, followed by further cuts.
However, they conclude: "While the recent market flush took out some of the froth, equity positioning and valuation still remain at risk especially if growth continues to decelerate and the Fed does not show urgency."