JPMorgan, $JPM, says stocks are so crowded they may crack at any time.
The chief global equity strategist at the Wall Street giant cautioned clients on Wednesday that they might find themselves "stuck on the wrong side" of the momentum trade when it eventually falters. He encouraged them to consider diversifying their holdings and to focus on risk management in their portfolios. He also reiterated his warning about excessive crowding in the market's best-performing stocks, which raises the risk of an imminent correction.
He expressed concern about sudden market shifts, citing past instances of flash crashes triggered by one fund de-leveraging, followed by others repositioning themselves, leading to a larger momentum unwind.
These remarks come as the first quarter for stocks nears its end with strong performance, with the S&P 500 Index on track for a roughly 10% return. The broad US equities benchmark is set to post its fifth consecutive month of gains, supported by strong corporate earnings, increasing enthusiasm around artificial intelligence, a healthy US economy, and signals from the Federal Reserve indicating its willingness to cut interest rates this year.
However, Lakos-Bujas sees reason for concern in these positive factors, noting that many positive expectations, from earnings to Fed expectations, have already been factored into stock prices. He also highlighted potential risks, including a lack of potential upside surprises beyond certain tech companies like Nvidia Corp. and risks associated with high levels of market crowding.
Historically, Lakos-Bujas pointed out that rush into popular momentum stocks has been followed by corrections, citing examples such as Tesla Inc.'s and Apple Inc.'s recent drops after strong previous years.
Despite the overall bullish sentiment on Wall Street, Lakos-Bujas and other JPMorgan strategists, including Marko Kolanovic, have remained bearish, with the lowest year-end target on the S&P 500 among big banks. Their views have not always aligned with market performance, as they remained bullish during market downturns and bearish during rallies in recent years.
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