S&P 500 to re-test 2022 lows in coming months before rallying 20%+ in H2 - JPM

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By Senad Karaahmetovic

JPMorgan equity strategists issued a warning to investors that market volatility will likely remain elevated in the coming months. As a result, strategists see “another round of sharp declines in equities.”

The S&P 500 should move lower to re-test 2022 lows, a consequence of the Federal Reserve overtightening into weaker fundamentals, the strategists added. The S&P 500’s two-year low sits just above the 3500 handle.

“Fundamentals will likely deteriorate as financial conditions continue to tighten and monetary policy turns even more restrictive (Fed raises rates by another 75-100bp with an additional ~$1T in QT), while the economy enters a mild recession with the labor market contracting and unemployment rate rising to ~5%,” the strategists wrote in a client note.

JPMorgan sees the “proverbial snowball” gaining momentum in 2023 as “consumers and corporates more meaningfully cut discretionary spending and capital investments.” As a result, strategists slashed the S&P 500 EPS estimate by $20 to $205 - significantly below the IBES consensus of $231 - citing weaker demand and pricing power, further margin compression, and lower buyback activity.

“Upside and downside to our base case will largely depend on the depth and length of the recession and the speed of the Fed’s counter-response,” they added.

While the first half of 2022 should see new market lows, JPMorgan equity strategists feel the Fed will be forced to pivot due to “disinflation, rising unemployment, and declining corporate sentiment.”

Fed’s pivot will subsequently drive an asset recovery, pushing the S&P 500 to 4200 by year-end 2023, they concluded.