JPMorgan painted a rather pessimistic picture for the U.S. stock market in 2024, boldly positioning itself as the most bearish investment bank on Wall Street.
The biggest U.S. bank is forecasting the S&P 500 to drop to 4,200 points next year, implying an 8% fall from current levels, in what can be described as a nightmare scenario for stocks.
Projecting this forecast on the SPDR S&P 500 ETF Trust (NYSE:SPY), the largest stock ETF could end up trading in line with pre-summer highs or October 2023 lows.
JPMorgan’s chief market strategist, Marko Kolanovic, and the team of equity analysts based their perspective on the rich valuations of U.S. stocks, “especially in light of the aging business cycle, restrictive monetary policy, and geopolitical risks.”
Chart: What An 8% Dip Looks Like For The SPY
Blind Spot Alert: S&P 500’s Valuation Soars To Extremes
One of the key red flags waved by JPMorgan is the startling divergence between the S&P 500’s current valuation and real interest rates. This detachment from fundamental realities has created a dangerous blind spot.
As Kolanovic and his team caution, “the market is far from appreciating the known risks.” These risks include the specter of a troubled commercial real estate sector, rising bankruptcies, and credit delinquencies, all of which lurk ominously in the shadows.
JPMorgan anticipates yet another year of low-single-digit earnings growth, with the added concern of sharp revisions to consensus growth estimates. The normalization of demand, coupled with growing margin pressure, is expected to be a formidable headwind for U.S. corporations.
In a financial forecast that could send shivers down the spines of investors, JPMorgan predicts that the next economic slowdown will likely result in earnings-per-share (EPS) falling by 30%, in line with recessions occurring after 1990.
Read also: Goldman Sachs’ 2024 Equity Outlook: Winning Stocks And Sectors To Watch
Analysts noted that in recent corporate reports, there has been a noticeable increase in concerns about consumers while companies maintain near-record caution regarding the high cost of capital.
As the cost of debt continues its upward trajectory, interest expenses are gradually on the rise. JPMorgan’s estimates reveal that approximately $800 billion of S&P 500 debt (excluding Financials) is slated to mature through 2025, a looming financial challenge that investors should not overlook.
Sectoral Shifts On Horizon: The End of Tech Dominance?
JPMorgan’s equity outlook also calls for a shift in sectoral leadership. The narrow dominance of tech and communications is expected to normalize in 2024.
In line with their outlook, JPMorgan recommends overweight positions in sectors such as energy, consumer staples, healthcare, and utilities.
Conversely, they advise a neutral weight for financials, tech, communication services, and materials.
For industrials, real estate, and consumer discretionary, JPMorgan recommends an underweight allocation, emphasizing the need for careful sector selection in a potentially treacherous 2024 market landscape.
| Sector | Corresponding ETF | JPM Recommended Allocation |
|---|---|---|
| Energy | Energy Select Sector SPDR Fund (NYSE:XLE) | Overweight |
| Consumer Staples | Consumer Staples Select Sector SPDR Fund (NYSE:XLP) | Overweight |
| Healthcare | Health Care Select Sector SPDR Fund (NYSE:XLV) | Overweight |
| Utilities | Utilities Select Sector SPDR Fund (NYSE:XLU) | Overweight |
| Financials | Financial Select Sector SPDR Fund (NYSE:XLF) | Neutral Weight |
| Tech | Technology Select Sector SPDR Fund (NYSE:XLK) | Neutral Weight |
| Communication Services | Communication Services Select Sector SPDR Fund (NYSE:XLC) | Neutral Weight |
| Materials | Materials Select Sector SPDR Fund (NYSE:XLB) | Neutral Weight |
| Industrials | Industrials Select Sector SPDR Fund (NYSE:XLI) | Underweight |
| Real Estate | Real Estate Select Sector SPDR Fund (NYSE:XLRE) | Underweight |
| Consumer Discretionary | Consumer Discretionary Select Sector SPDR Fund (NYSE:XLY) | Underweight |
Now read: Big-Tech Rally Continues: S&P 500 Could Return 11% In 2024
Photo: Shutterstock
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Get insight into trading platforms. Compare the best online stock brokerages.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
