S&P 500 forecast: 4,200 (8.8% loss)
Stock-market outlook: New year, same target. Strategists at JPMorgan saw no reason to touch their S&P 500 price target from last year, though that means they’ve gone from relatively optimistic to the most bearish major investment firm on Wall Street.
Ironically, JPMorgan is bearish because of what bulls have long hoped for: lower inflation. Weaker price growth will prevent companies from padding their profit margins by passing on price hikes, which the firm believes will be a huge headache while they pay out higher wages.
Unless interest rates plunge, which may not happen if inflation falls back to normal, JPMorgan thinks earnings will suffer. It’s calling for 2% to 3% growth, which would disappoint the Street.
“Absent rapid Fed easing, we expect a more challenging macro backdrop for stocks next year with softening consumer trends at a time when investor positioning and sentiment have mostly reversed,” wrote JPMorgan market strategy chief Marko Kolanovic and US equity strategy head Dubravko Lakos-Bujas in a note about their 2024 outlook. “Equities are now richly valued with volatility near the historical low, while geopolitical and political risks remain elevated.”
Economic outlook: A recession should be a serious concern for investors, JPMorgan believes.
“While it is difficult to pin down the start date and depth of a recession ahead of time, we think it is a live risk for next year even though investors are not pricing in this uncertainty consistently across geographies, styles, and sectors yet,” Kolanovic and Lakos-Bujas wrote.
It’s certainly possible for the US to escape a recession as inflation falls, but investors should be prepared for a hard landing. JPMorgan warned that the best-case scenario isn’t the most likely.
“While we are not outright calling for a recession as our base case, our concern remains around the relative resilience of the current goldilocks backdrop, the narrow margin of error for a soft landing, and reassertion of late-cycle dynamics,” Kolanovic and Lakos-Bujas wrote.
Investing ideas: Considering its cautious outlooks for stocks and the economy, it’s fitting that JPMorgan thinks investors should be careful heading into the new year.
“We favor a more defensive positioning within styles/sectors given a combination of softening GDP growth, elevated rates versus history, and downside risks to corporate profits,” Kolanovic and Lakos-Bujas wrote.
If next year is negative for stocks, the economy, or both, portfolio managers can play defense by investing in high-quality companies in cheap, downturn-resistant sectors like utilities and healthcare, according to JPMorgan. And while energy stocks are economically sensitive, they also appear to be a strong bet since they’re inexpensive and a hedge against geopolitical risks.