The best-performing stocks in the US stock market are overcrowded, increasing the risk of an impending pullback.
The Zhitong Finance App learned that Dubravko Lakos-Bujas, J.P. Morgan's chief global stock strategist, warned on Wednesday that the best-performing stocks in the US stock market are too crowded, increasing the risk of an impending correction. He recommended that clients consider diversifying their holdings and considering risk management in their portfolios.
“It could come out of nowhere one day. This has happened in the past; we have experienced flash crashes,” Lakos-Bujos said. “One large fund began to be deleveraged. The second fund heard the news and tried to adjust its position. The third fund was basically caught off guard. Next, the market began to release more and more momentum.”
As he made these remarks, the first quarter is nearing its end, and the S&P 500 index is expected to return about 10%. The S&P 500 index will rise for the fifth month in a row because corporate profits are still strong, people's enthusiasm for artificial intelligence continues to heat up, the US economy continues to be healthy, and the Federal Reserve has sent a signal to cut interest rates this year.
However, Lakos-Bujas said that “many favorable factors have been digested,” including corporate earnings reports and Federal Reserve expectations, and even that former US President Donald Trump may win the general election, which will be seen as beneficial to the market. Furthermore, other than the prospects for Nvidia (NVDA.US) and artificial intelligence innovation, he sees little to no surprising positive news. “The source of this upward surprise is becoming more limited, and on the other hand, there are indeed more risks lurking behind the scenes,” he said.
Furthermore, looking back at recent history, there is usually a pullback after investors flock to buy popular momentum stocks like the “Big 7.” This has happened three times since the global financial crisis.
Lakos-Bujas said, “Historically, whenever there was such a high level of congestion, the momentum factor faced a significant release from the left tail after a few weeks.” He pointed out that after experiencing a strong 2023, Tesla (TSLA.US) and Apple (AAPL.US) plummeted 27% and 10% respectively this year.
He said, “Who will be next? When?”
Lakos-Bujas and other strategists at J.P. Morgan Chase, including Marko Kolanovic, were among the few bearers on Wall Street this year. As the stock market continues to reach new highs, most peers raised their expectations for the US stock market, but they are still pessimistic about whether the rally will continue. J.P. Morgan Chase's year-end target for the S&P 500 is 4,200 points, down nearly 20% from current levels. This is also the most pessimistic forecast among Wall Street banks.
However, J.P. Morgan's forecast for the US stock market failed to come true for two consecutive years because Lakos-Bujas and Kolanovic remained bullish for most of the 2022 stock market crash, and then took a bearish stance when the S&P 500 rose 24% last year.