JPMorgan Chase: If the Federal Reserve does not have an urgent need to relax monetary policy, then US stocks still face risks

JPMorgan Chase analyst Lakos-Bujas recently stated that the recent sharp decline in the US stock market has washed away some of the bubbles in the market. However, if the US economic growth continues to slow down and the Federal Reserve does not show an urgency to ease monetary policy, then the related positions and valuations of US stocks still face risks.

On Thursday, Lakos-Bujas told clients that the stock market is no longer in a unilateral uptrend, but more of a two-way trend. Factors such as downside risks to economic growth, timing of Federal Reserve actions, crowded positions, high valuations, presidential elections, geopolitical uncertainties, etc., will all impact the market.

Lakos-Bujas believes that in the first half of this year, the market's focus was mainly on the inflation trajectory, while in the second half, it will focus on economic growth risks and high corporate profit expectations. The current market pullback is being driven by concerns related to profit growth and a repricing of recession probabilities.

Earlier this week, a volatility doomsday scenario reoccurred as a large amount of selling led to a surge in volatility, similar to flash crashes in 2018 and 2015. JPMorgan Chase pointed out that trend-following liquidation, weak seasonal factors, and US election risks led to the market's sharp decline.

JPMorgan Chase previously emphasized that extreme positioning and trend-following crowding have historically led to severe liquidation events.

Lakos-Bujas also pointed out that the recent stock rotation appears to be more of an intra-cycle liquidation rather than the beginning of a trend-driven sell-off across the entire cycle.

JPMorgan Chase listed the current styles and industries from most favored to least favored as: quality value stocks (i.e., high-quality stocks at reasonable prices, low volatility stocks, utilities), quality growth stocks (large-cap tech stocks and semiconductors), high beta value and value stocks (speculative growth stocks, cyclical stocks, small-cap stocks).

JPMorgan Chase Market Strategy Director

This is what Dubravko Lakos-Bujas wrote in his first job report as the market strategy director at JPMorgan Chase. Lakos-Bujas's predecessor was Marko Kolanovic. In early July this year, Marko Kolanovic announced his resignation, ending his 19-year tenure.

An analysis article on the Wall Street News website on July 13th mentioned that Kolanovic, who is considered the "best contrarian indicator for US stocks" and has perfectly missed the big wave of the past year's bull market, leaving may not be good news for the US stock bulls. Looking back to the end of August 1999, when Charles Clough, the chief investment strategist at Merrill Lynch who was most bearish on US stocks at the time, resigned, a few months later the internet bubble began to burst. After Kolanovic, who was bearish on US stocks, resigned, less than a month later, the global stock market experienced the August crash.

Urgency of Federal Reserve Action

Currently, due to the increasing concerns in the market about a US economic recession, more and more investors are calling for the Federal Reserve to take interest rate cuts as soon as possible, even calling for emergency rate cuts between meetings However, contrary to market sentiment, Goldman Sachs' chief economist Jan Hatzius poured cold water on the calls for a rate cut. Goldman Sachs' model analysis results show that even if the economy is currently growing at a rate of over 2% (which is generally considered healthy), a significant and sustained decline in the stock market is needed to push the economy into a recession. Therefore, the Federal Reserve does not need to cut interest rates urgently