3 Catalysts Could Trigger a 10% Stock Market Drop This Summer, Says JPMorgan

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  • The S&P 500 could fall 10% over the summer months to 4,800, according to JPMorgan.

  • The bank highlighted three catalysts that could cause a decline.

  • The May jobs report could trigger a bearish narrative shift in the stock market.

A massive 10% sell-off in the stock market is possible this summer after a massive rally since the start of the year, according to J.P. Morgan.

The bank’s trading desk said in a recent note that the S&P500 could test the 5,000 level as support and potentially fall below with a decline of up to 10%. This would bring the index to around 4,800.

According to the trading desk, three major catalysts could cause such a sell-off.

“Buyer Exhaustion”

The stock’s recent earnings season performance suggests that potential stock buyers are burning out.

The bank pointed out that companies that beat earnings expectations for the first quarter underperformed the S&P 500, while those that fell short of expectations were punished.

“The combination of stock performance during earnings season and narrowing market breadth indicates that the market needs a new set of catalysts and/or reassurance about the dominant market narrative” , JPMorgan said.

That means simple macroeconomic data and a cautious Fed could lead investors on the sidelines come second-quarter earnings, which begin in mid-July.

“Relax your momentum”

Most of the stock market’s recent gains have been driven by momentum, with technology stocks leading the advance.

However, if momentum falters, there could be a larger pullback that would push stock prices lower.

“The key to watch is the short end of the momentum. If this runs out of steam, it would trigger a larger degression as part of the slowdown in this momentum. This chain reaction is what could lead to a 5-fold pullback at 10%,” JPMorgan said.

“Macro Data Disappointment”

The re-emergence of a stagflation or recession scenario would kill the hopes of a soft landing of the economy and likely depress stock prices.

This narrative shift could happen Friday with the May jobs report.

JPMorgan said an employment report below the 50,000 to 75,000 range or above the 250,000 to 300,000 range could trigger a narrative shift and hurt stock prices.

Current estimates from economists suggest that about 190,000 jobs were added to the economy in May.

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