JPMorgan cautions of increasing disparity between ongoing stock market growth and postponed interest rate reductions

JPMorgan cautions of increasing disparity between ongoing stock market growth and postponed interest rate reductions

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  • The growing gap between surging stocks and the Fed’s continued reluctance to cut interest rates should be cause for concern, JPMorgan believes.

  • Expectations for rate cuts have returned to 80 basis points, reminiscent of the stock market’s decline last October.

  • Analysts highlighted expected market growth in the second half of the year, but cautioned against assuming this would lead to higher profit forecasts for 2025.

The fact that stocks continue to set new records amid signs of late interest rate cuts is concerning, according to JPMorgan.

In research sent to clients on Tuesday, JPMorgan’s Mislav Matejka and his team noted that stocks have climbed 30% since last October’s low, largely fueled by expectations of lower interest rates. in March. But three months later, those projections have been significantly pushed back.

Looking closer, Wall Street initially predicted an 80 basis point rate cut by the Fed during the October recession. When the market surged, expectations were revised to 180 basis points in January, the height of dovishness. Today, those forecasts have been recalibrated to 80 basis points.

“Stocks are ignoring the most recent pivot, which could be a mistake,” the analysts wrote in the note, adding that corporate profits will need to accelerate to close the gap.

Fed Funds Futures vs. S&P 500Fed Funds Futures vs. S&P 500

Fed Funds Futures vs. S&P 500Bloomberg Finance LP

JPMorgan also expects bond yields to fall in the second half, but there is also a slight rise in inflation swaps, which could further delay a rate cut. Combined with bond yields once again below expectations, this reveals “a great deal of complacency in the bond market regarding inflation risk.”

AI-driven tech stocks have helped the S&P 500 hit waves of rallies in 2024. Meanwhile, rising inflation has prompted the Fed to push back its first rate cut forecast from March to June . Despite this, some analysts predicted less than 50% chance for a drop in June due to the latest inflation indices.

Matejka’s team further pointed out that there is an assumption of market growth in the second half of the year, but this does not mean that the profit forecast for 2025 would increase.

Furthermore, they highlighted the market’s alarming complacency about downside risks, with a recession probability of just 7th percentile, likely underestimated. Additionally, the rise in cyclical and defensive stocks mirrors levels seen during the post-global financial crisis recovery in 2009-2010, signaling potential over-allocation.

“This is unlikely to be the pattern this time, and could be a hindrance. The next time bond yields fall, we don’t think the market will have as positive a reaction as in November-December – “We could return to a more traditional correlation between returns and stocks,” the team added.

Read the original article on Business Insider

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