The resilience of the US economy has only postponed the coming recession, JPMorgan’s Dubravko Lakos-Bujas said.
The rally in the S&P 500 is capped through the rest of the year, JPMorgan’s Dubravko Lakos said.
That’s because there are a litany of negative factors heading into 2024 that will weigh on equities.
The strength of the US economy has only postponed a coming recession, not averted one, he added.
The rally is stocks is done for the year, as there’s a huge cocktail of factors that will weigh on the market through the end of 2023, according to JPMorgan’s chief global stock strategist Dubravko Lakos.
While many on Wall Street are still predicting new highs to come for the S&P 500 this year, even as the market struggles in August, any further upside is likely capped by a host of factors, Lakos said.
The benchmark index rallied nearly 20% through July, and the benchmark index is still just 9% shy of a new all-time high even after August’s tough sell-off.
But Lakos warned investors in an interview with CNBC this week to not be so sure that the gains will keep coming. Here’s what he sees as headwinds to more upside.
Stock prices are high relative to earnings. The S&P 500 is currently trading around a price-to-earnings ratio of 20, a level Lakos describes as a “ceiling.”Investor positioning is too bullish. That contrasts to the start of the year, when investors were overly bearish, Lakos said. Investors pumped $45 billion into stocks during the month of June alone, according to Bank of America data.Monetary policy is likely to remain tight. Fed officials will likely keep interest rates elevated through the rest of the year and aren’t likely to start cutting anytime soon as they continue to keep an eye on inflation, Lakos said. Fiscal Policy will get tighter. 2023 has been a “massive fiscal easing year” as the government shelled out $1.8 trillion, Lakos said, but federal spending will likely pull back significantly in 2024, which could weigh on economic growth.
And while bullish market commentators have made the case that the US could avoid a recession this year, any resilience in the economy now is largely due to strong fiscal spending and consumer spending, Lakos said, both of which are expected to decline into 2024. Consumer savings are also dwindling fast, he said, which will remove a buffer that’s been cushioning the economy from tight financial conditions.
“I think there is no landing, no landing, until you get to hard landing. I don’t buy into the soft-landing thesis.” Lakos said, calling a recession for the US economy inevitable. “I just have a hard time believing that inflation is gonna come down, the Fed is going to be cutting rates, and growth will be just fine.”
Stocks could tumble 15% even in the event of a mild downturn, JPMorgan’s Marko Kolanovic predicted in a recent note.
Investors are now pricing in a 42% chance the Fed will raise rates another 25 basis-points in November. Meanwhile, the New York Fed sees a recession as more likely than not over the next year, forecasting a 66% chance the economy will tip into a downturn by July 2024.