Stock market sell-off has 'further to go,' JPMorgan warns

The recent slump in the U.S. stock market is likely to be the start of a deeper sell-off, according to JPMorgan strategists. 

Although stocks rebounded at the start of the week, the market still faces a slew of macroeconomic risks, JPMorgan's chief market strategist Marko Kolanovic wrote in a note on Monday. Those headwinds include dwindling expectations the Federal Reserve will cut interest rates this year, signs of sticky inflation and higher-than-average equity valuations.

"Price action may depend on earnings and could stabilize near-term," Kolanovic said. "Beyond this, however, we think the sell-off has further to go. We remain concerned about continued complacency in equity valuations, inflation staying too hot, further Fed repricing, and a profit outlook where the implied acceleration this year might end up too optimistic."

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Stocks rallied on Monday as investors awaited a barrage of earnings from Big Tech companies and economic data releases later in the week, including first-quarter gross domestic product and the Fed's favorite inflation gauge. 

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The Nasdaq Composite led the way with a 1.1% gain, while the Dow Jones Industrial Average rose 0.7% and the S&P 500 climbed 0.9%. Equities appeared poised to continue those gains on Tuesday morning.

But Kolanovic suggested the gains are unlikely to last, comparing the current market outlook to that of summer 2023.

"The current market narrative and patterns are increasingly resembling those of last summer, when upside inflation surprises and hawkish Fed revisions drove a correction in risk assets, but investor positioning now appears more elevated," he wrote.

The gloomy forecast comes after a volatile year for the stock market. 

All three indexes tumbled in mid-2023 amid fears the Federal Reserve would raise interest rates higher than previously expected – and hold them at peak levels for longer. But they have recouped many of those losses, with the S&P 500 up about 22% since it hit bottom at the end of October. 

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Since the start of the year, the benchmark index is up about 6.6%, while the Dow Jones Industrial Average has climbed just 1.78%. The tech-heavy Nasdaq Composite, meanwhile, has increased about 5.9%.

Kolanovic's forecast is one of the most pessimistic on Wall Street. He and his peers see the S&P ending the year at 4,200 – the lowest year-end target among Wall Street banks. From current levels, that implies a nearly 17% drop.