Market, Economy Likely to Worsen Before Improving: JPMorgan Strategist

The stock market and the U.S. economy are likely to undergo tougher times before they improve, JPMorgan’s chief market strategist said Tuesday on CNBC, calling prospects for an economic soft landing scenario less likely.

In 2022, JPMorgan strategists focused on U.S. consumer and corporate resilience, “but as the time progresses, they’re less and less resilient,” Marko Kolanovic said on the network’s “Fast Money” show.

“We do think we will have a recession; the question is whether it’s a mild or less mild, both here in the U.S. and in Europe,” he said. “So as the time passes, we think that fundamentals are deteriorating.”

Equity markets are not currently pricing in a recession and are likely to move lower, with many segments trading as if the energy crisis, war and sharp monetary tightening didn’t happen last year, JPMorgan analysts said in note issued Monday. A companion note indicated the firm expects the current market rally to start fading this quarter and suggested investors use potential gains in the coming weeks to reduce exposure.

Kolanovic wrote a week ago that JPMorgan “turned outright negative on global equities” in December, and noted that weakening economic data and an anticipated decline in earnings expectations suggest markets will move lower.

Investors may believe narratives that the recession is over, but JPMorgan disagrees, Kolanovic said on CNBC, noting that data from regional Federal Reserve economic surveys indicate weakening.

“So the question is for me, what’s going to make this survey turn up, these data points turn up, and I don’t see that happening” unless the Fed cuts interest rates, and the Fed doesn’t have an intention to cut now, “so I do think things have to get worse before they get better,” Kolanovic said.

“Overall, we do think the direction of the economy is south,” he said. A corporate CEO may say things look fine now, “but are they going to be fine in three, six or nine months? The market should look a little bit ahead of that.”

JPMorgan in December cut its 2023 S&P 500 earnings per share forecast to $205 and said the index could retest its 2022 low. That forecast prices in a mild recession, Kolanovic said Tuesday, calling the multiple a little high given that the Fed continues to raise interest rates.

S&P 500 earnings could hit $220 or $230 a share if there’s no recession or $180 to $190 with a more serious downturn, he said. The investment firm sees an economic soft landing as unlikely; it expects the Fed to react quickly to a downturn, Kolanovic said.

“We think things first turn south, get much worse,” he explained. “Then the Fed quickly cuts, or reacts or signals cutting, and that basically [moves] us higher. So we still are hoping that there’s going to be some backstop.”

The economy and markets couldn’t function properly long term if the Fed moves its benchmark interest rate to 5% or higher, Kolanovic added. “But we think at some point they’ll backstop it. So [the] big question is where? Is it 3,600, 3,400, 3,200 [for the S&P 500]? We don’t have a very strong conviction, but we do think lower is the direction.”

Pictured: [Marko Kolanovic]. (Photo via JPMorgan)