New York City, NY – The stock market has made a remarkable recovery on Monday, bouncing back from its recent slump. However, bearish strategists on Wall Street remain cautious, pointing out persistent concerns that could continue to unsettle stock investors. As Federal Reserve interest rate cut expectations fade and signs of stubborn inflation persist, coupled with stocks trading at elevated valuations, many experts fear that the market may be heading towards a similar situation as it did during the three-month downturn in late summer and fall of 2023.
JPMorgan’s chief market strategist, Marko Kolanovic, cautioned that while price action may stabilize in the near term depending on earnings, there could be further downside ahead. He highlighted concerns about complacency in equity valuations, hot inflation levels, potential Fed repricing, and an overly optimistic profit outlook. The current market narrative and patterns are starting to resemble those observed last summer, when unexpected inflation spikes and hawkish Fed adjustments led to a correction in risk assets.
Analysts like Julian Emanuel of Evercore ISI are closely monitoring the 2-year Treasury yield, which recently hit 5% for the first time since November 2023. The surge in bond yields has also coincided with a sell-off in stocks. Emanuel emphasized that the market’s reaction is influenced by the implicit promise of expected Fed rate cuts being scaled back, leading to a shift in market sentiment since March.
Additionally, Morgan Stanley’s chief investment officer, Mike Wilson, warned about the impact of rising 10-year Treasury yields on stock valuations. With yields surpassing critical levels, there could be downward pressure on multiples, potentially resulting in a 5% downside risk for the S&P 500 index within the next three months. Wilson emphasized that any further increase in yields would need to be supported by earnings growth rather than multiple expansion to sustain stock market performance.
In conclusion, while the stock market has shown resilience in recent trading sessions, underlying concerns about inflation, interest rates, and valuations continue to loom over investors. The trajectory of the market in the coming months will largely depend on how these factors evolve and impact investor sentiment.