The market's rebound may put stocks at risk when the full tariff impacts take hold

JPMorgan is warning clients that the recent equity market rebound since early April, driven by technical factors and short covering, may be unsustainable as valuations are now stretched. The bank expects softening economic growth and rising consumer prices due to tariff impacts, potentially leading to stagflation fears and a weaker period for stocks; Northwestern Mutual Wealth Management notes tariffs remain significantly above pre-Trump levels, posing downside risk to the market, though a recession is not currently forecast.

Analysis

JPMorgan strategist Mislav Matejka highlights that the equity market's rebound since early April, which pushed the S&P 500 above its April 2nd levels, was significantly influenced by technical factors such as short covering and systematic rerisking, which are no longer prevalent. Valuations are now described as "stretched," suggesting future market movements will rely more on fundamental outcomes. Matejka's team anticipates a softening in economic growth and a potential rise in consumer prices in the coming months, partly due to a "payback for frontloading of orders" ahead of tariff implementations, which could reignite fears of stagflation and lead to a weaker period for stocks. Compounding these concerns, trade tensions persist, with China refuting U.S. claims regarding a preliminary agreement. Even if current trade disputes resolve, Northwestern Mutual Wealth Management's chief portfolio manager, Matt Stucky, notes that existing tariffs, estimated at 12%, remain substantially above pre-Trump levels, posing a significant economic impact and downside risk for the market, potentially leading to a "run-of-the-mill" correction unless the unemployment rate climbs. While consumer spending currently supports the market, Stucky cautions that consumer reactions to higher prices, expected later this month and into the summer, are a key variable to monitor. The S&P 500, despite its recovery from April lows, has not achieved new highs since February, reflecting underlying market hesitancy.

Key Decisions for Investors

• Investors should exercise caution as the recent equity market rally appears driven by technical factors that have largely dissipated, leaving valuations stretched and fundamentals as the key future driver.
• Monitor closely upcoming economic data, particularly consumer price inflation, consumer spending patterns, and unemployment rates, to gauge the actual impact of tariffs and the potential emergence of stagflationary pressures.
• Consider adopting a more defensive stance, as the current 12% tariff rate and potential for softening economic growth could precipitate a market correction, even if a full-blown recession is not the immediate base case.