JPMorgan warns stock rally will fizzle with Fed fallout 'still ahead of us'

Bullish investors will soon be disappointed by an end to the early-year stock market rally, according to JPMorgan strategists. 

In a Monday analyst note, the team – led by Mislav Matejka – argued that a recession could still be in the cards for the U.S. economy, given that tighter monetary policy works with a lag. 

“It might be premature to believe that recession is off the table now, when Fed will have done 500bp+ of tightening in a year, and the impact of monetary policy tended to be felt with a lag on the real economy, of as much as 1-2 years,” Matejka wrote. 

Federal Reserve policymakers voted to raise interest rates eight consecutive times to a range of 4.5% to 4.75%, and signaled last month that a “couple more” increases are on the table this year. 


Ticker Security Last Change Change %
I:DJI DOW JONES AVERAGES 33826.69 +129.84 +0.39%
I:COMP NASDAQ COMPOSITE INDEX 11787.271825 -68.56 -0.58%
SP500 S&P 500 4079.09 -11.32 -0.28%

But a slew of hotter-than-expected economic data reports, including the blowout January jobs report and a disappointing inflation report that pointed to the pervasiveness of high consumer prices, has raised the specter of a higher peak rate. Markets are unlikely to hit bottom until the Fed ends its aggressive interest-rate hike campaign and begins to cut, the JPMorgan team said.

“Historically, equities do not typically bottom before the Fed is advanced with cutting, and we never saw a low before the Fed has even stopped hiking,” the strategists wrote. “The damage has been done, and the fallout is likely still ahead of us.”

Wall Street in New York

Wall Street suffered a brutal year in 2022.  (John Taggart/Bloomberg via Getty Images / Getty Images)

The gloomy forecast comes after a brutal year for the stock market, its worst since the 2008 financial crisis. All three indexes tumbled in 2022, snapping a three-year win streak. 

The Dow Jones Industrial Average ended the year down 8.8%, the best of the three. The S&P 500 sank 19.4%, while the tech-heavy Nasdaq Composite plunged 33.1%. 

Stocks initially rallied in early 2023, although equities have lost some of that momentum amid rate-hike fears. The S&P closed Friday up about 6.67% from the start of the year, but down about 0.83% for the week.


Federal Reserve Chairman Jerome Powell

Federal Reserve Chairman Jerome Powell arrives to speak during a news conference following a Federal Open Market Committee meeting in Washington, D.C., on Sept 21, 2022. (Sarah Silbiger/Bloomberg via Getty Images / Getty Images)

JPMorgan is not alone in its bearish outlook. Bank of America chief economist Michael Hartnett last week predicted a “no landing” scenario in the first half of the year, where there is no immediate slowdown in growth, but inflation remains above trend. That would likely force the Fed to raise interest rates much higher than previously forecast – and keep them elevated for longer. 

“No landing means no Fed pausing,” Hartnett wrote, warning that central bank tightening “always breaks something.” 

He projected the S&P 500 could tumble nearly 7% by early March as a result.