One of Wall Street’s biggest bulls is getting less bullish on stocks, according to a Monday note.JPMorgan’s Marko Kolanovic trimmed his overweight exposure to equities due to the rising risk of a Fed policy error.”The increasingly hawkish rhetoric from central banks, and escalation of the war in Ukraine are likely to delay the economic and market recovery,” he said. Loading Something is loading.
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JPMorgan’s chief global market strategist Marko Kolanovic is getting less bullish on stocks as risks rise that the hawkish Federal Reserve may force a policy error with its aggressive interest rate hikes.
In a Monday note, he reduced exposure to equities in his model portfolio by 3%, and redistributed the allocation to government and corporate bonds.
“We trim risk in our model portfolio this month given increasing risks around central banks making a hawkish policy error and geopolitics. Recent developments on these fronts – namely, the increasingly hawkish rhetoric from central banks, and escalation of the war in Ukraine – are likely to delay the economic and market recovery,” Kolanovic said.
The note comes after the Fed raised interest rates by another 75 basis points last month in its ongoing bid to tame inflation. Following September’s higher-than-expected inflation reading, the Fed is expected to raise interest rates by another 75 basis points at its November and December FOMC meetings.
“A rapid tightening in financial conditions often generates unintended stresses,” Kolanovic said.
Meanwhile, the destruction of the Nord Stream gas pipelines increases the potential for a tail risk event and makes it difficult for tensions between Russia and Ukraine to de-escalate in the near term, he added.
Still, despite the cut to Kolanovic’s equity allocation, he does remain overweight the asset class and expects ongoing resilience in both stocks and the global economy. Kolanovic has not turned bearish, but is simply less bullish than before.
That’s evidenced by his year-end price target of 4,800 for the S&P 500, which represents potential upside of 30% from current levels, though he did concede that his target may not be reached until 2023.
Part of Kolanovic’s still relatively bullish call on stocks comes from the fact that investor sentiment is depressed, and so is positioning.
“With investors fleeing almost every asset class this year, the amount of cash sitting on the sidelines has reached a 10-year high according to our estimates, indicating a support for not only equities but also bonds going forward. As such, we trim the size of both our equity overweight and bond underweight, but remain overall overweight equities and commodities,” he said.
What drives stock prices from now until year-end will likely be the direction of bond yields, according to Kolanovic, alluding to a trend seen in recent trading sessions where yield volatility has led to big swings in the stock market.
Finally, third-quarter earnings are likely to see some weakness amid a continued decline in purchase manager index readings and an imminent recession in Europe, Kolanovic said.