(Bloomberg) — This week will be crucial in determining whether stock valuations — particularly for megacap Big Tech companies — are sustainable, according to JPMorgan Chase & Co.’s Marko Kolanovic.
Most Read from Bloomberg
That’s especially the case given that investors are pricing in significant for earnings growth in anticipation of interest-rate cuts coming sooner than Federal Reserve officials project, the strategist wrote in a note to clients on Monday. Five Big Tech companies with a combined market value of more than $10 trillion report results this week, including Apple Inc., Microsoft Corp. and Alphabet Inc.
Those firms, along with the other members of the so-called Magnificent Seven growth companies in the S&P 500 Index — Amazon.com Inc., Nvidia Corp., Meta Platforms Inc. and Tesla Inc. — carry a nearly 34% premium to the index in terms of forward price-to-earnings, data compiled by Bloomberg show. The megacaps have also driven the bulk of the market’s advance over the past year.
“As long as the market stays narrow, heavily concentrated and tech-driven, the US is likely to have the upper hand” over the euro zone, Kolanovic wrote. He’s keeping his preference for quality growth over cyclical value, favoring the US over the euro region.
Ahead of Wednesday’s Fed decision, JPMorgan’s view is that the central bank will start lowering rates in June, with a quarter-point cut each meeting thereafter this year.
Inflation Risk
With that said, core inflation will likely prove firmer in the first half of 2024 than the market anticipates, a scenario that is underpriced in large-cap equities and credit after a strong rally since late October pushed both into “expensive valuation territory,” Kolanovic said.
“A few bad inflation prints would likely upset both bond and equity markets, as risk markets could again start pricing a higher probability of ‘hard landing,’” he said.
In swaps markets, bets on a quarter-point reduction in the federal funds target this quarter have ebbed to about 50%, from over 70% a month ago. Traders are now leaning toward the first cut coming in May.
JPMorgan this month trimmed its overweight recommendation on Treasuries “to fade the market’s hype” around early and aggressive moves on rates.
Read more: BofA Sees Green Shoots From Cyclicals This Earnings Season
Kolanovic also reiterated that he sees the divergence between Chinese stocks and those of the developed world as having approached extreme levels.
His view on US equities has failed to materialize for two consecutive years. The strategist was bullish throughout most of 2022’s rout and maintained a pessimistic outlook across last year’s big rally, cutting his stock allocation over concerns of an economic downturn.
The firm sees the S&P 500 dropping to 4,200 by the end of 2024 — the lowest of the nearly two dozen Wall Street firms tracked by Bloomberg and roughly 14% below its current trading level.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.