JPMorgan Warns Of Potential For 'Flash Crash' As Stocks Wrap Historic Stretch

Topline

Stocks are on a historic tear, but market experts maintain there’s still plenty of potential for a painful stretch for investors this year.

Traders work on the floor of the New York Stock Exchange on Wednesday. Getty Images

Key Facts

On the final trading session of March and the first quarter, the returns for major stock indexes are impressive, with the Dow Jones Industrial Average up 5% this quarter or 2,000 points and the S&P 500 and the tech-heavy Nasdaq up 11% apiece.

Stock superlatives for 2024’s opening stretch are numerous, including each of the three indexes setting respective all-time highs and the benchmark S&P heading toward its best first-quarter return since 2019 and its second consecutive quarter of double-digit percentage gains since 2011-12.

Yet the rally, which few on Wall Street saw coming in 2022 and early 2023 as the typically painful interest rate hikes took hold, still shows signs of a potentially damaging drawdown, according to strategists at top firms.

JPMorgan Chase’s top global equity strategist Dubravko Lakos-Bujos told clients this week to brace for the possibility of a “flash crash” which could “come one day out of the blue.”

Lakos-Bujos cited the “high degree of crowding” which could lead to a major “momentum unwind” from fund managers if there’s a domino effect of repositioning , an unwinding which would translate to noticeable declines in stock indexes.

Goldman Sachs strategists, whose year-end S&P forecast of 5,200 indicates they expect the index to decline about 1%, warned clients last week that the market’s high concentration in the most valuable technology stocks “could exacerbate” a major selloff scenario, with the Goldman group led by David Kostin laying out such a situation in which the S&P ends 2024 at 4,500, about 17% below its Thursday price.

Surprising Fact

Even if the stock rally storms ahead, history suggests it’s highly likely there will be some speed bumps. The S&P’s 1.7% maximum intra-year decline so far in 2024 would be by far the lowest such drawdown dating back to 1928, far below 1995’s prior record of a 2.5% drawdown, according to Creative Planning chief market strategist Charlie Bilello.

Key Background

Stocks have mostly been on fire for the last 18 months, and the S&P has gained almost 50% from its October 2022 bottom. The rally somewhat miraculously came as interest rates climbed to their highest level since 2001 at a balmy 5.25% to 5.5%, defying typical logic that monetary policy tightening tends to bring pain for equity investors due to the lower consumer spending and weaker corporate earnings power associated with higher borrowing costs. Buoying much of the rally are the tech stocks benefiting the most from investor hype about artificial intelligence, such as Nvidia, whose shares are up more than 700% over the last 18 months.

Tangent

Stocks are at a historically rich valuation compared to companies’ actual financial results. The S&P currently trades at about 25 times its constituent companies’ earnings over the last 12 months, up about 50% from its late 2022 price-to-earnings ratio and sitting at its highest relative valuation of the last two decades, excluding the pandemic-skewed stretch in 2020 and 2021. The significantly higher price-to-earnings ratio indicates that investors are highly bullish on companies’ ability to rake in higher future profits and is a strong sign of a bull market.

Further Reading

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