JP Morgan Strategist: "Cash will looksbetter than stocks in 2024 as Fed won't cut rates quickly"

The year 2024 will not be great for stocks, believes Marko Kolanovic, chief strategist for global markets at JP Morgan, writes Business Insider. In a note to clients published mid-week, Kolanovic wrote that investors should prefer cash over stocks next year as the Federal Reserve appears unlikely to cut interest rates quickly.

According to the JPMorgan strategist, investors are placing too much emphasis on the idea that an economic recession will be avoided in 2024. That idea, along with the fact that valuations are high, credit spreads are tight and volatility is "unusually low," suggests to Kolanovic that now is not the time for stock accumulation. "

We remain cautious on risk assets and the macro outlook due to: the interest rate shock (over the last eighteen months) which should have a negative impact on economic activity, declining consumer power, geopolitical turbulence and high risk asset valuations ", Kolanovic wrote.

"Even in an optimistic scenario, we believe that upside potential is limited for risky assets."

However, it should be noted that JPMorgan's strategist had a bearish outlook since late last year, but that proved wrong as the stock rallied this year. Kolanovic expects both inflation and demand to fall next year, which should weigh on stock prices. "In the United States, post-pandemic turbulence, increased monetary pressures and reduced tax offsets should help reduce economic growth below trend in 2024," Kolanovic said.

Importantly, the strategist is not buying into the idea that the Federal Reserve will cut interest rates aggressively in 2024, as many investors currently expect, because it will be difficult for inflation to fall from the current level of 3% to the long-term target of the Fed, of 2%. In his view, only a cooling labor market will allow inflation to return to the 2% level, meaning rate cuts are likely to be less than expected next year.

"We do not expect the Fed to take firm measures against inflation, but to maintain a modest restrictive policy," said Kolanovic.

In his view, gains for U.S. stocks will be limited, if not negative, in 2024, among the reasons being subdued corporate profit growth, a reversal in companies' tendency to pass on price increases to customers, and the high likelihood that volatility will return in market after falling to abnormally low levels this year. "After a record period in terms of the transfer by companies of prices to customers (n.r. pricing power), the recent disinflationary trend should become a major obstacle for corporate margins (...). We expect lower sequential revenue growth, flat margins and lower share buyback programs," the strategist wrote.

Kolanovic has a target of 4,200 points for the S&P 500 in 2024, equivalent to a decline of about 12% from the index's mid-week level, according to Business Insider.