JPMorgan analysts have raised concerns about the potential for an extended sell-off in the US stock market. In a recent client note, they cited several factors that could impact investor sentiment and market stability.
One concern is the upcoming earnings season, with approximately 40% of US companies by market capitalization scheduled to report this week. JPMorgan believes the market’s movements may hinge on these results, with a potential for stabilization in the near term.
However, the bank warns against complacency in equity valuations, highlighting persistent inflation, the potential for further Federal Reserve rate hikes, and an overly optimistic profit outlook for the year. They note that the current market narrative and patterns resemble those of last summer, when upside inflation surprises and hawkish Fed revisions led to a correction in risk assets.
JPMorgan also points to other factors that could contribute to a tense backdrop for equity markets, including the strength of the US dollar, rising bond yields, elevated oil prices, and increased market concentration. They highlight the significant expansion in multiples, historically low volatility metrics, and the tightest credit spreads since 2007.
In contrast to the concerns about the US market, the report highlights opportunities in Japanese consumption-related stocks. They expect substantial wage increases in the 2024 spring wage negotiations, which could drive real wage growth and boost personal consumption. This scenario could serve as a catalyst for Japanese stocks linked to consumer spending.
The report also briefly touches on foreign exchange and commodities markets. JPMorgan notes that the strong US dollar reflects fundamental factors and that foreign exchange carry trades are yielding returns. In commodities, they anticipate that rallying base and precious metal prices have room to grow through 2024, with geopolitics likely to remain a bullish factor.
