As the US stock market enjoys a five-month rally, JP Morgan Chase Co.'s chief global equity strategist, Dubravko Lakos-Bujas, cautions investors that an unexpected downturn could be on the horizon. He advises diversification and risk management to avoid being caught off guard by a sudden momentum shift, highlighting the dangers of excessive investment in top-performing stocks.
Lakos-Bujas's warning comes amidst a strong first quarter for stocks, with the S&P 500 Index seeing about a 10% return. Despite this success, driven by robust corporate earnings, AI enthusiasm, a healthy US economy, and potential Federal Reserve rate cuts, he believes these factors have already been accounted for in market prices. He points to limited sources of positive surprises, with Nvidia Corp. and AI innovation being notable exceptions, while underlying risks remain.
Reflecting on recent trends, Lakos-Bujas notes that a rush into popular momentum stocks often precedes a market correction. He cites the significant drops in Tesla Inc. and Apple Inc. this year as examples of what may come if the current momentum unwinds. This pattern of correction following crowding has been observed three times since the Global Financial Crisis.
Despite a bullish market, JP Morgan remains one of the few Wall Street firms with a bearish outlook, holding the lowest year-end S&P 500 target among major banks. This stance comes after two years of predictions that did not pan out, as Lakos-Bujas and his colleague Marko Kolanovic maintained a bearish view during last year's 24% S&P 500 rally.
