JPMorgan warns of growing disconnect between continued stock market gains and delayed rate cuts

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  • JPMorgan Chase & Co. said the growing gap between surging stocks and the Federal Reserve’s continued resistance to rate cuts should be concerning.

  • Rate cut expectations have risen back to 80 basis points, reminiscent of last October’s stock market downturn.

  • Analysts highlighted expected market growth in the second half of the year but warned against assuming this would boost profit forecasts for 2025.

JPMorgan said the fact that stocks continue to hit new highs amid signs of a delay in interest rate cuts is concerning.

In a research note sent to clients on Tuesday, JPMorgan’s Mislav Matejka and his team noted that stocks have surged 30% since their lowest point in October, largely due to the Driven by expectations of interest rate cuts. Three months later, however, those predictions have been overturned. Enough of the crowding.

Looking more closely, Wall Street initially expected the Fed to cut interest rates by 80 basis points in October amid the economic downturn. Expectations were revised to 180 basis points at the peak of dovishness in January when markets soared. Now, those forecasts have been readjusted back to 80 bps.

“Stocks may have made a mistake by ignoring the latest turn,” analysts wrote in a note, adding that corporate profits would need to accelerate to make up the difference.

Fed Funds Futures and the S&P 500 IndexFed Funds Futures and the S&P 500 Index

Fed Funds Futures and the S&P 500 IndexBloomberg Finance

JPMorgan also expects bond yields to fall in the second half of the year, but inflation swaps have also risen, which could further delay rate cuts. Coupled with bond returns once again falling short of expectations, it signals “complacency in many bond markets about inflation risks.”

Artificial intelligence-driven technology stocks will drive the S&P 500 index to rise one after another in 2024. At the same time, rising inflation has prompted the Federal Reserve to push up expectations for its first interest rate cut to March to June. Still, some analysts believe that Prediction probability is less than 50% Rate cut in June due to latest inflation reading.

The Matejka team further pointed out that assuming the market will grow in the second half of the year, this does not mean that profit forecasts for 2025 will be raised.

Most importantly, they highlight the market’s alarming complacency about downside risks, with the probability of a recession at just seven percent likely being underestimated. Additionally, the surge in cyclical and defensive stocks mirrored levels seen during the recovery from the 2009-2010 global financial crisis. , signaling potential overallocation.

“This is unlikely to be the template this time around and could be a headwind. The next time bond yields fall, we don’t think the market will react as positively as we did in November-December – we may return to yields and More traditional correlations between stocks,” the team added.

Read the original article business insider

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