JPMorgan Chase strategist warns: S&P 500 index may plummet by 23% by the end of the year

On Friday, although the S&P 500 index hit a new high intraday, Morgan Stanley's strategist Marko Kolanovic and his team insist that in the coming months, the US economy will slow down and corporate earnings will be downgraded, among other unfavorable factors, leading to a dilemma for the US stock market.

Kolanovic and his team stated in their mid-year outlook report:

There is a clear disconnect between the significant increase in US stock market valuations and the business cycle. Given the weakened economic growth expectations, the 15% rise in the S&P 500 index so far this year is not reasonable. In the next few quarters, there may be risks contrary to optimistic expectations: slowing economic growth, stubborn inflation, and long-term interest rates not significantly declining.

Kolanovic is now skeptical about the optimism in the US stock market, pointing out that key economic indicators are stagnating, and consumers are showing signs of distress.

In addition, the number of rate cuts by the Federal Reserve may fall short of market expectations, further putting pressure on US economic and stock market valuations in the second half of the year.

As of this Thursday, the S&P 500 index has set 31 record closing highs this year, driven by excitement around artificial intelligence.

Kolanovic recommends investors to diversify their investments, increase exposure to defensive value stocks such as utilities, consumer staples, healthcare, and high dividend stocks.

Kolanovic admits that he underestimated the resilience of large tech companies in terms of price momentum and profit growth. However, he warns that the concentration of these stocks and their market leadership is at extreme levels not seen in decades. Morgan Stanley estimates that without the impact of the 20 largest stocks in the index, the S&P 500 index would be around 4700 points.

The Morgan Stanley team states that for the US stock market's strength to continue, earnings forecasts need to be raised, which they believe is challenging. Instead, they expect Wall Street analysts to lower their estimates after the second-quarter earnings reports are released.

Kolanovic points out that while it is difficult to predict when the market will reverse and rotate, exaggerated trends often undergo sharp corrections when the excessive fluctuations in price and sentiment end, and major institutional investors are no longer chasing.

Kolanovic predicts that the S&P 500 index will fall to around 4200 points by the end of the year, a decrease of about 23% from its Thursday closing point of 5483 points. Data released on Friday showed that the US core PCE price index rose 2.6% year-on-year in May, the lowest increase in three years, indicating a cooling inflation. Boosted by this data, the S&P 500 index hit a new high intraday, approaching 5524 points, before retreating from the day's high.

Kolanovic's bearish view on the US stock market remains consistent with his previous views. With the continuous rise of US stocks this year, Wall Street analysts from Goldman Sachs, Citigroup, Bank of America, and others have raised their forecasts, even Morgan Stanley's prominent strategist Mike Wilson, who was in the bearish camp with Kolanovic last year, has stopped issuing such warnings this year Kolanovic remains unmoved, and JPMorgan Chase's target price forecast for US stocks is the lowest among Wall Street strategists tracked by the media, making it quite prominent.

It is worth noting that Kolanovic's forecasting track record in recent years has not been ideal. He remained optimistic in 2022, when the S&P 500 index fell by 19%; took a bearish view in 2023, while the S&P 500 index surged by 24% during the same period; and still maintains a pessimistic attitude this year as the US stock market continues to rise