(Bloomberg) -- JPMorgan Chase & Co. strategist Marko Kolanovic reiterated in a note to clients Monday that he sees downside risk for the stock market between now and the end of the first quarter, as the bank reduced its recommended equity allocation due to a soft economic outlook in 2023.
The bank now rates stocks as “moderate underweight” down from “overweight” and is trimming its risk exposure in commodities, while increasing its allocation to corporate bonds and cash, according to a team of strategists led by Kolanovic.
One of Wall Streets biggest optimists through the market selloff earlier this year, Kolanovic has since reversed his view. He reiterated his forecast that the S&P 500 Index will retest its previous lows in early 2023 as financial conditions continue to tighten and monetary policy turns even more restrictive “while the economy enters a mild recession,” he wrote.
“Our view is that market and economic weakness may occur in 2023 as a result of central bank overtightening, with Europe first and the US to follow later next year,” Kolanovic and his team wrote.
In the second half of 2023, he expects that markets will likely turn their focus toward better economic prospects and corporate fundamentals and trade at higher levels than now.
“This sell-off combined with disinflation, rising unemployment, and declining corporate sentiment should be enough for the Fed to start signaling a pivot, subsequently driving an asset recovery, and pushing S&P 500 to 4,200 by year-end 2023,” Kolanovic said.
However, for a Fed pivot to take place, the strategist is waiting on confirmation from a combination of factors including economic deterioration, a rise in unemployment, market volatility, a decline in risky assets and a drop in inflation.
To be sure, most of Kolanovic’s calls didn’t work out this year. His previous 4,800 price target on the S&P 500 this year is 20% higher than where the benchmark closed on Monday. The bank’s year-end target of 4,200 for the index next year suggests a 5.3% gain from where it currently stands.
That said, Kolanovic did urge investors to buy the dip in China equities during their October meltdown. The MSCI China index has gained double-digits since then.
