JP Morgan remains bearish: US stocks are too crowded, beware of flash crash risks

According to the Zhitong Finance and Economics APP, Dubravko Lakos-Bujas, Chief Global Equity Strategist at Morgan Stanley, warned on Wednesday that the best-performing stocks in the US stock market are becoming too crowded, increasing the risk of an imminent pullback. He advised clients to consider diversifying their holdings and implementing risk management in their investment portfolios.

"It could happen suddenly one day. This scenario has occurred in the past, we have experienced flash crashes," Lakos-Bujas said. "One large fund starts deleveraging, the second fund hears the news and tries to adjust positions, the third fund is basically caught off guard, and then the market starts to see increasing momentum release."

At the time of his statement, as the first quarter draws to a close, the S&P 500 index is expected to achieve a return of around 10%. The S&P 500 index is set to rise for the fifth consecutive month, driven by strong corporate earnings, increasing enthusiasm for artificial intelligence, a healthy US economy, and signals from the Federal Reserve of rate cuts this year.

However, Lakos-Bujas noted that "many positive factors have already been priced in," including corporate earnings and Fed expectations, and even the potential victory of former US President Donald Trump in the upcoming election, which would be seen as favorable for the market. In addition, apart from the prospects of Nvidia (NVDA.US) and artificial intelligence innovation, he believes there are hardly any surprising positive news. "The sources of upside surprises are becoming increasingly limited, while on the other hand, there are indeed more risks lurking behind the scenes," he said.

Furthermore, looking back at recent history, investors tend to experience pullbacks after flocking to popular momentum stocks like the "Big Seven." This situation has occurred three times since the global financial crisis.

Lakos-Bujas stated, "Historically, whenever there is such a high level of crowding, the momentum factor faces a significant left tail release a few weeks later." He pointed out that after strong performances in 2023, Tesla (TSLA.US) and Apple (AAPL.US) have plummeted by 27% and 10% respectively this year.

He asked, "Who will be next? When?"

Lakos-Bujas and other strategists at Morgan Stanley, including Marko Kolanovic, are among the few bears on Wall Street this year. While most peers have raised their expectations for the US stock market as it continues to hit new highs, they remain pessimistic about the sustainability of the uptrend. Morgan Stanley's year-end target for the S&P 500 index is 4,200 points, nearly 20% below the current level, making it the most pessimistic forecast among major Wall Street banks However, JP Morgan's forecasts for the US stock market have not been accurate for two consecutive years, as Lakos-Bujas and Kolanovic remained bullish for most of the time during the stock market crash in 2022, and then took a bearish stance when the S&P 500 index rose by 24% last year