JPMorgan's warning lifted: "Darker moment" for US stocks may be over, credit market signals
1min read J.P. Morgan believes that the worst of the US stock market's correction may be over, with the performance of the credit markets indicating that the risk of a US recession is decreasing.J.P. Morgan strategists Nicholas Panigirtzoglou and Mikael Kindberg stated in a report on Wednesday that the credit market, which has been proven accurate many times over the past two years, is more optimistic about the risk of a US recession than the stock or interest rate markets. They argued that the credit market's skepticism about the risk of a US recession is worth paying attention to.J.P. Morgan's analysis revealed that small stocks are more sensitive to domestic economic growth, and they believe the risk of a US recession is 50%, while the debt market believes it is only 9% to 12%. In contrast, the interest rate and commodity markets show similar expectations as the stock market.J.P. Morgan's view is a relief to investors, as concerns about the world's largest economy have been growing, leading to the stock market approaching a correction area. This week, analysts at several banks, including goldman and citigroup, cut their outlooks for US stocks on concerns about economic growth, while market forecasters such as Ed Yardeni have lowered their bullish expectations for 2025.The market has been struggling amid President Trump's erratic trade policies and ongoing government layoffs, with the S&P 500 falling nearly 9% from its February record high and tech stocks undergoing a correction.J.P. Morgan strategists noted that the recent stock market decline appeared to be more driven by quantitative funds rebalancing their positions than by fundamental or discretionary fund managers re-evaluating the risk of a US recession.Some multi-strategy hedge funds are facing their biggest challenges since the early days of the pandemic, as the market sell-off forced them to unwind crowded trades at an astonishing pace. Macro hedge fund expert Brevan Howard Asset Management is significantly reducing the risk its traders can take on, as the decline in performance has wiped out last year's gains.However, the market may get some support from the continued inflows of exchange-traded funds. J.P. Morgan strategists said that potential buying from mutual funds and US fixed-income pension funds, as well as some sovereign wealth investors, rebalancing at the end of the month or quarter, could also boost the stock market, with the total amount of buying likely to be about $135bn.They said: "If US equity ETFs continue to flow in as they have done so far, then most of the current correction in the US stock market is likely to be over."
