The S&P 500 could drop 10% over the summer months to 4,800, according to JPMorgan.
The bank highlighted three catalysts that could drive a decline.
The May jobs report could spark a bearish narrative change in the stock market.
A 10% sell-off in the stock market is possible this summer after a massive year-to-date rally, according to JPMorgan.
The bank’s trading desk said in a recent note that the S&P 500 could test the 5,000 level as support and potentially fall below with a decline of as much as 10%. That would put the index at about 4,800.
According to the trading desk, there are three big catalysts that could drive such a sell-off.
“Buyer’s exhaustion”
The recent performance of stocks during earnings season suggests potential equity buyers are getting exhausted.
The bank highlighted that companies that beat first quarter earnings expectations underperformed the S&P 500 while companies that missed expectations were punished.
“The combination of earnings season stock performance and narrowing market breadth points to a market that needs a new set of catalysts and/or reassurance about the prevailing market narrative,” JPMorgan said.
That means merely in-line macro data and a cautious Fed could drive investors to the sidelines during second-quarter earnings, which begin in mid-July.
“Momentum unwind”
The bulk of the stock market’s recent gains have been driven by momentum, with tech stocks leading the advance.
However, if momentum falters, there could be a larger unwind that drives stock prices lower.
“The key to watch is the short leg of momentum. If that falters, it would trigger a larger degrossing as part of that momentum unwind. That chain reaction is what could lead to a 5% – 10% pullback,” JPMorgan said.
“Macro data disappointment”
The re-emergence of a stagflation or recessionary narrative would kill hopes of a soft landing in the economy and likely drive stock prices lower.
That narrative change could happen on Friday with the May jobs report.
JPMorgan said a jobs report below 50,000 to 75,000 range or above the 250,000 to 300,000 range could spark a narrative change and hurt stock prices.
Current economist estimates suggest about 190,000 jobs were added to the economy in May.
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