(Bloomberg) — It’s the talk of the stock market: What will be the sign that the five-month rally in US equities is coming to an end. But if you ask JPMorgan Chase Co.’s Dubravko Lakos-Bujas, investors may not see it coming when it hits.
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The Wall Street giant’s chief global equity strategist warned clients on Wednesday that they could be “stuck on the wrong side” of the momentum trade when it eventually falters, and he encouraged them to consider diversifying their holdings and thinking about risk management in their portfolios. He also reiterated his warning that excessive crowding in the market’s best-performing stocks raises the risk of an imminent correction.
“It just might come one day out of the blue. This has happened in the past, we’ve had flash crashes,” Lakos-Bujos said in a webinar. “One big fund starts de-levering some positions, a second fund hears that and tries to re-position, the third fund basically gets caught off guard, and the next thing you know, we start having a bigger and bigger momentum unwind.”
His remarks come in the final trading days of a strong first quarter for stocks, with the S&P 500 Index on track for a roughly 10% return. The broad US equities benchmark will post its fifth consecutive month of gains as corporate earnings remain strong, enthusiasm around artificial intelligence keeps building, the US economy continues to be healthy and the Federal Reserve signals its willingness to cut interest rates this year
But to Lakos-Bujas, that list actually is a reason for concern.
“A lot of goodies have gotten priced in,” he said, from earnings and Fed expectations, to even a potential election victory for former president Donald Trump, which he said would be viewed as helpful for the market. Moreover, he sees few sources of upside surprise beyond Nvidia Corp. and the prospects for AI innovation. “That source of upside surprise is becoming more and more limited, and on the flipside, you do have more risks that are hovering in the background,” he said.
Moreover, looking at recent history, the rush into popular momentum stocks like the Magnificent Seven typically is followed by a correction. It’s happened three times since the Global Financial Crisis.
“Historically, whenever you had such a high degree of crowding it was a question of weeks before the momentum factor faced a big fat left tail unwind,” Lakos-Bujas said, pointing to Tesla Inc.’s 27% plunge and Apple Inc.’s 10% drop this year after strong 2023s as examples of what’s to come.
“Who is going to be the next one — and when?” he said.
Lakos-Bujas and other strategists at JPMorgan, including Marko Kolanovic, have been among few bearish contrarians on Wall Street this year. As most of their peers raise their US equity outlooks, with the stock market continually setting new highs, they have remained pessimistic that the gains would stick. Among the big Wall Street banks, the firm holds the lowest year-end target on the S&P 500 of 4,200, implying a drop of nearly 20% from Wednesday’s level.
The bank’s house view on US equities has failed to materialize for two consecutive years as Lakos-Bujas and Kolanovic remained bullish throughout most of 2022’s rout and then held a bearish stance during last year’s 24% rally in the S&P 500.
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Source: finance.yahoo.com