© Reuters JPMorgan’s Kolanovic says ‘build-up’ of market froth could keep rates higher for longer
Stocks have rallied this year despite higher bond yields and lower hopes for rate cuts.
According to analysts at JPMorgan, this could indicate that investors “assume that the rise in yields reflects an economic acceleration”, however, projections for 2024 earnings “are not reacting positively and the market is now too complacent about the cycle” , they wrote in a note Monday.
As for key catalysts, analysts expect US economic momentum to slow, with real GDP growth expected between 0 and 1% by mid-year. While the job market continues to be a strength, this could change quickly and the pace of retail sales is starting to slow.
Furthermore, the Federal Reserve’s recent increase in futures prices may reflect not only a more optimistic growth forecast, but also concerns about continuing inflation.
Furthermore, profit margins “are softening, revenue growth is weakening, net interest expenses are expected to rebound, and ULCs may begin to increase,” the analysts noted.
Finally, the US forward P/E ratio of 21x is significantly extended, especially when compared to real yields. Meanwhile, sentiment and positioning metrics are approaching peak levels.
“Stocks continuing to push to new record highs and Bitcoin moving above $60,000 could indicate froth building in the market,” the analysts said.
“This could keep monetary policy higher for longer, as a premature rate cut risks further inflating asset prices or causing another surge in inflation.”