Stock Market Outlook ‘Rhymes With 2008’ As Headwinds Keep Piling up

• JPMorgan’s top quant guru is taking a victory lap as the S&P 500 nears his 4,200 price target.
• But JPMorgan’s Marko Kolanovic doesn’t think the pain is over yet for stock market investors.
• “History doesn’t repeat, but it rhymes with 2008,” he said of his stock market outlook.

The stock market has already sold off sharply but could still be in for a world of pain if the expectations of JPMorgan’s top quant guru materialize.

JPMorgan chief global markets strategist Marko Kolanovic, along with Bram Kaplan and Dubravko Lakos-Bujas, said in a Wednesday note that even as the S&P 500 approaches their 4,200 price target, there is still more downside risk than there is upside.

“Despite the strong early-summer rally, our framework continues to point to challenging macro fundamentals and headwinds for risky assets,” Kolanovic said. “History doesn’t repeat, but it rhymes with 2008.”

The headwinds that continue to challenge stock prices include still-elevated market valuations, overly bullish investor positioning, and ongoing tightening in the form of higher interest rates and the Federal Reserve’s balance-sheet reduction plans.

It also doesn’t help that much of the gains in the stock market this year have been concentrated in a handful of mega-cap tech stocks, while massive fiscal spending in 2021 and 2022 is beginning to moderate and consumers’ cash savings are being depleted, according to Kolanovic. 

All of this informs his bearish view that investors should favor cash, which is currently yielding about 5%, rather than stocks in the medium term.

“This will likely remain the case as long as interest rates remain in deeply restrictive territory and the overhang of geopolitical risks persists,” Kolanovic said.

The Fed has hiked rates to just over 5%, and Minneapolis Fed President Neel Kashkari warned this week that another 25-basis-point hike is more likely than not. This interest rate shock is bound to have a negative impact on the economy, no matter how long the lag time is. 

“The current change in interest rates is about 5 times larger than the 2002-2008 increase,” Kolanovic said, pointing to the rise in consumer loan interest rates. And this has led to a marked rise in delinquencies for credit cards, auto loans, and Chapter 11 bankruptcy filings.

Mortgages have been so far able to avoid the rise in delinquencies because most consumers were able to lock in very low interest rates, Kolanovic highlighted. But that’s not enough to prevent continued downside for risk assets. 

“The impact on consumers is negative, and there is nothing to reverse this trend unless interest rates are cut,” Kolanovic said. “In addition, interest rate increases are disproportionately impacting small businesses and commercial real estate.” 

And don’t expect the AI boom to save the economy. Kolanovic highlighted that while AI could boost the stock market in a speculative fashion, “that could equally quickly disappear.” 

The similarities between 2008 and today are too strong to ignore, according to Kolanovic, and that should warrant caution from investors. 

“What we find remarkable is that going into the crisis in 2007, investors were discussing the exact same topics as today: Fed pause, consumer resiliency, soft landing, strong jobs, etc,” Kolanovic said.

While Kolanovic did not change his 4,200 price target on the S&P 500 and did not offer a forecast of how far the stock market could fall from here, he is sure in no rush to raise it.