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JPMorgan's Kolanovic remains one of the few strategists with a bearish market outlook amid a record 2024 S&P 500 rally. Retobkeller/

JPMorgan Chase chief global market strategist and co-head of global research, Marko Kolanovic, reportedly said last week in a mid-year outlook that the S&P 500 will drop almost 23% from 5,483 on June 27 to 4,200 by the end of 2024 amid an economic slump and headwinds like downward earnings revisions.

US real gross domestic product increased at an annual rate of 1.4% in Q1 2024, a marked decline from 3.4% growth in Q4 2023. Kolanovic and his team's gloomy economic outlook comes as the S&P 500 looks on track to reach record highs. It surpassed the 5,500 mark in early trading on June 28, as cooling US inflation continues to drive bets on US Federal Reserve rate cuts later this year. The market rally on excitement around AI has translated to massive gains for tech investors.

Kolanovic is one of the few strategists who have retained their bearish outlooks all year despite peers at Goldman Sachs, Citigroup, and Bank of America upgrading their 2024 S&P 500 targets to keep up with the year-long market rally. The average 2024-end projection for the index stood at 5,317, implying a 3% fall.

"There is a clear disconnect in the huge run-up in US equity valuations and the business cycle," the JPMorgan strategists wrote, adding that the S&P 500's 15% year-to-date climb is not justified, considering faltering growth forecasts.

"There is a risk that an opposite of the hopeful expectation could play out in coming quarters where growth decelerates, inflation remains firm, and long-term rates don't move sharply lower," they added.

Kolanovic was bullish in 2022 when the S&P 500 plummeted 19% and bearish last year when the equity gauge jumped 24%. His scepticism of the market rally comes from lagging economic metrics and signs of consumer distress.

He highlighted that the US Fed could deliver fewer rate cuts than the market anticipates, further mounting pressure on the economy and stock valuations in the latter half of the year. Kolanovic suggested diversification by enhancing exposure to "anti-momentum" defensive value plays such as utilities, health care, and dividend stocks.

Kolanovic Acknowledges The 'Underappreciated' Market Resiliency

The top strategist acknowledged he "underappreciated the resiliency" of big tech firms in terms of price momentum and earnings growth while cautioning that the high concentration into those stocks is at "multi-decade extremes."

The investment bank calculated that the S&P 500 would have hovered around the 4,700 level without the price movements of the 20 largest stocks in the index. The strategists believe upward earnings forecast revisions are necessary for the group's strength to sustain, something they view as a "challenge." They expect Wall Street analysts to notch down their estimates after Q2 earnings results.

"While timing reversals and rotations is difficult, we are in the camp that hyperbolic moves in price and sentiment are more often violently corrected than not when the exuberance runs its course, and the largest institutional investors are done chasing," Kolanovic concluded.

Housing Market a Drag on Economy, Labour Market Loses Steam

Bank of America analysts recently highlighted that the US housing affordability crisis would remain the same until at least 2026 amid record property prices and short supply as homeowners stay locked into pre-pandemic mortgage rates amid elevated inflation.

Latest data from the US Census Bureau revealed that new single-family rental sales in May fell by over 11% quarter-over-quarter to 619,000, while construction of new residential homes plummetted 5.5% to 1.27 million. Meanwhile, the median sales price of a new house sold in May also jumped to $417,400. These factors have analysts concerned about the housing market becoming a drag on the economy in the foreseeable future.

Elsewhere, economists and some US Fed officials are concerned about the labour market losing steam. Strong hiring has helped the US economy navigate historic rate hikes. Still, growing unemployment at lower levels, leading to fewer job openings and workers quitting less this year, could end tight labour market conditions.

Inflation remains higher than the US Fed's target and is also driving speculations that further softening in labour conditions could threaten economic growth.

"Any change in the outlook for the labour market could have significant implications for the direction of the economy and monetary policy," said Rubeela Farooqi, chief US economist at High Frequency Economics. "If there is one thing we know for sure, it is that conditions change very quickly."

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