A top Wall Street analyst is revising his bearish forecast for both the U.S. stock market and economy, thanks to last week’s June inflation report. Marko Kolanovic, chief global markets strategist at JPMorgan Chase & Co., notes that the smaller-than-expected rise in the consumer-price index for June has slightly increased the chances of a soft landing for the economy—an outcome that stock-market bulls have been eagerly hoping for.
While Kolanovic still predicts that the Fed will hike rates at the July meeting, the lower-than-anticipated CPI surprise now suggests a more promising path to a soft landing. The June inflation report reveals that consumer prices in the U.S. only rose by 0.2% last month—the slowest pace since August 2021 and below the expectations of economists polled by The Wall Street Journal.
Following the release of this data, Kolanovic cautions that bond valuations are currently looking “rich.” He advises clients to maintain their bearish positions against long-dated U.S. bonds, such as the 10-year Treasury notes and 30-year Treasury bonds.
On Tuesday, yields for both the 10-year and 30-year bond were slightly lower, reflecting the cautious sentiment among investors. The 30-year yield TMUBMUSD30Y, 3.897% dropped 1.3 basis points to 3.908%, while the 10-year TMUBMUSD10Y, 3.763% decreased by 2.3 basis points to 3.776%.
Kolanovic’s earlier optimism about stocks entering 2022 had him doubling-down on his bullish stance as stock prices dipped during the first half of the year. However, his team accurately predicted last summer’s short-lived rally and subsequently adopted a bearish outlook for 2023. Their reasoning was that an impending recession would likely drive equity valuations even lower.
Skepticism Surrounding Stock Market Rebound
Since the rebound of the stock market, there has been a growing sense of skepticism among investors. The surge in technology stocks, fueled by the artificial intelligence software boom, has led many to question the sustainability of this upward trend. In light of these concerns, one analyst and his team have advised clients to exercise caution and focus on defensive stocks and the Japanese market, which have proven to be strong performers in the first half of this year.
Valuations for U.S. Stock Market Leaders
While some may argue that valuations for U.S. stock market leaders are justified, there are those who remain unconvinced. This particular analyst still believes that these valuations may be stretched. However, there is potential for small- and mid-cap U.S. stocks to experience significant upside if core inflation returns to a 2.5% 12-month pace in a relatively short period of time. It is worth noting that core inflation fell slightly below economists’ expectations at 4.8% on a trailing 12-month basis in June, rather than the anticipated 5% pace.
The Nickname and Accolades
Over the years, this analyst has gained recognition for his impressive predictions and insights. Bloomberg News affectionately nicknamed him “Gandalf” in 2015 after accurately predicting a sudden selloff that impacted U.S. stocks at the end of that summer. Since then, he has consistently ranked highly in Institutional Investors’ annual polls of top Wall Street analysts.
The State of U.S. Stocks
On Tuesday, U.S. stocks demonstrated mostly positive performance. The Dow Jones Industrial Average took the lead as investors carefully processed a wave of earnings reports from major U.S. companies. Notably, shares of Verizon Communications experienced significant growth, driving the blue-chip gauge higher. The surge came after reports surfaced about the telecoms giant and its competitors planning to conduct lead contamination tests.
Rethinking Expectations for a Recession
The analyst mentioned previously is not the only one reconsidering expectations for an impending recession following the recent inflation update. Jan Hatzius, the Chief Economist of Goldman Sachs Group, has also adjusted the probability of a recession occurring within the next 12 months. He revised the likelihood from 25% to 20%, suggesting that recent data have bolstered confidence in the ability to manage inflation without resorting to a recession.