Stocks have advanced this year despite higher bond yields and diminishing hopes for rate cuts.
According to JPMorgan’s analysts, this may indicate that investors “assumed that the yields upmove is reflective of economic acceleration,” however, the projections for 2024 earnings “are not reacting positively and the market is now too complacent on the cycle,” they wrote in a Monday note.
Regarding key catalysts, analysts anticipate that US economic momentum will slow down, with real GDP growth forecasted to be between 0-1% by the middle of the year. While the labor market continues to be a strong point, this situation could rapidly shift, and the pace of retail sales is starting to decline.
Moreover, the recent increase in Federal Reserve futures prices may not solely reflect a more optimistic growth forecast but also concerns over enduring inflation.
Additionally, profit margins “are softening, topline growth is weakening, net interest expense is set to move back up, and ULCs could start increasing,” analysts noted.
Finally, the US forward price-to-earnings ratio, at 21x, is significantly extended, particularly when compared to real yields. Meanwhile, sentiment and positioning metrics are approaching their peak levels.
“Stocks continuing to push to new record highs and Bitcoin surging over $60k may indicate accumulating froth in the market,” said the analysts.
“This may keep monetary policy higher for longer, as premature rate cutting risks further inflating asset prices or causing another leg up in inflation.”