JPMorgan Warns Conditions Behind Latest Stock Surge Unlikely To Support ‘Sustained’ Rally - Forbes

rinwengi.blogspot.com

Topline

Market conditions do not support last week’s blistering stock rally, JPMorgan strategists cautioned Monday, as the divide widens between those warning about the lingering effects of tight financial conditions and those declaring the worst is over.

Key Facts

Each of the three major U.S. stock indexes notched their best returns of 2023 last week after the Federal Reserve changed its tune on the direction of monetary policy, driving down bond yields significantly as the market increasingly bet interest rates will not increase past their current 22-year high.

The “knee-jerk positive” reaction to the belief rates have peaked will likely not lead to a “sustained bounce” for stocks, a team led by JPMorgan’s head global equity strategist Mislav Matejka wrote in a note to clients.

Matejka warned stocks and bonds will “revert back to an unattractive risk-reward” proposition by the end of the year.”

The relief from yields is little more than “short-term help” as U.S. stocks trade at historically expensive levels compared to adjusted returns for bond investors and compared to price-to-earnings valuations for international stocks, Matejka added.

Crucial Quote

“Higher interest rates and financing costs will crunch earnings and profit margins,” BlackRock Investment Institute Jean Bolvin warned Monday in a similarly skeptical note to clients, pointing to how higher lending rates will weigh on profits at growth-focused companies who rely on debt financing. Even though 10-year U.S. bond yields declined at their steepest weekly rate in a year, they remain “sharply higher” year-to-date, Bolvin added.

Contra

Despite stocks’ historically poor performance during times of high interest rates and bond yields, it’s far from a consensus view on Wall Street that stocks will continue to be weighed down by the adverse financial environment. Bank of America quantitative strategists led by Savita Subramanian declared Monday that companies already “had their earnings recession” and have already stuck the “soft landing” on their way to growth, pointing to 4% annual growth among S&P 500 companies during the third quarter. Solita Marcelli, UBS Global Wealth Management’s chief investment officer of America, bemoaned Monday that the market “failed to celebrate” blockbuster earnings from large technology companies.