JPMorgan Chase & Co. says that the U.S. Federal Reserve’s interest rate policy is a serious threat to the growth of U.S. equities.
Speaking to CNBC, JPMorgan Chase’s head of U.S. equity and quantitative strategies Dubravko Lakos-Bujas said, “We’ve had diverging pressures…from a Fed that’s trying to tighten while the rest of the world is trying to ease.”
“The more that the Fed tries to tighten, it pressures the dollar upwards and it pressures commodity prices lower,” he added.
JPMorgan Chase is the Most Bearish of Wall Street Banks
JPMorgan Chase now has the most bearish outlook on the S&P 500. Having ended last year with a price target of 2,200, JPMorgan recently slashed its S&P 500 target to 2,000.
Citing weak earnings, the bank believes that U.S. equity will continue to stall as the year progresses. Till date, a third of the S&P 500 names have posted negative growth in both revenue and earnings.
The terrible start to 2016 has sent bears on the rampage and clawed major benchmark indices. The S&P ended last week down 5.1 percent, for its worst January since 2009.
The uncertainty surrounding the global economy has made a growing number of analysts worry about the Fed making a policy mistake by raising rates.
Lakos-Bujas, for one, feels the Fed is increasing the prospect of an earnings recession, which could further deteriorate the risk-reward pay-off for equities. The only hope he says, is for Fed Chair Janet Yellen to change her stance. “If the Fed takes a more dovish view, I think it will provide a relief for the U.S. economy,” he said.
JPMorgan Chase Thinks the Coming Quarters Could Bring Pain
As for the rest of 2016, Lakos-Bujas has kept his expectations low.
For this quarter, “we’re calling for anywhere from a 2 to 3 percent earnings surprise.” However, the next three to six months could pose tough challenges. JPMorgan Chase & Co. has cited multiple reasons for the likely pain in store, including a deteriorating macro economic scenario and a struggling U.S. manufacturing sector.
“U.S. manufacturing sector is already in recession territory…and the non-manufacturing sector continues to decelerate,” Lakos Bujas said in his coverage.
Despite these risks, Lakos-Bujas does not see a new crisis brewing. A recession “is a possibility, but I wouldn’t say that. I would more so say that there’s concern over a bear market. With the S&P around 1,900 right now, that could mean we maybe see 1,700 at some point.”
S&P 500 ended Friday at 1940.24.