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Dow Crash Coming after Steady 2-Week Climb, Warns JP Morgan

Last Updated September 23, 2020 12:51 PM
Ben Brown
Last Updated September 23, 2020 12:51 PM

As the Dow Jones creeps back towards record highs, JP Morgan sounds the warning alarm. In an interview with CNBC , JP Morgan strategist Jasslyn Yeo said she sees the stock market climbing higher for two more weeks before a deep correction kicks in.

“I think these two weeks will still be good for equities markets as we move into the Fed rate cut, but after the Fed delivers we think that earnings could face some risk.”

Yeo says investors are buying equities on “hope”, but that poor earnings out of corporate America will quickly bring investors back to reality. She sees a “significant” correction when traders finally take stock of the numbers.

Dow creeps up towards record highs

The S&P 500 and Nasdaq roared to all-time highs yesterday, but the Dow lagged after poor results at Boeing. This morning’s picture is a little brighter. At 6.41 am ET, Dow futures  edged a modest 45 points higher (0.17 percent).

Dow Jones Industrial Average (DJIA) futures chart
Dow Jones Industrial Average (DJIA) futures crept higher on Thursday, but JP Morgan warns of sharp correction ahead. | Source: Yahoo Finance

After closing at record highs, the S&P 500 looks set to open slightly lower. S&P 500 futures  were marginally lower at the time of writing while Nasdaq futures  fell 0.36 percent.

The Dow is looking frothy

Asked whether she thinks the US markets are looking toppish, Yeo said:

“I think so. I think there’s limited upside. So you look at the US equity market, I think it’s loosing momentum. In the near term, there will be support for the multiple expansion from the Fed cut, but after which is a big question mark.”

Yeo wouldn’t be drawn on predicting how far the Dow might fall, but she said the downside risk is “significant.”

Investors are buying stocks on “hope”

The Federal Reserve’s increasingly dovish rhetoric has pushed the US stock market to record highs. But is there any solid fundamental growth behind the move? Yeo doesn’t think so.

“When we look at the global growth environment we haven’t seen evidence that there’s a sustainable recovery yet. People are just buying equities on hope that markets are going to be picking up and growth is going to deliver, but to me, I haven’t seen that in the numbers.”

Her analysis echoes many others in the space. Just two days ago, Piper Jaffray & Co warned of a “meaningful correction.” Meanwhile, Wall Street giants are beginning to take money off the table, such as $200 billion wealth fund Pictet.

The looming Federal Reserve cut in July will continue to dominate the narrative and support stocks for the next two weeks. After that, it’s time to take a long, hard look at the underlying corporate performance. As CCN.com reported, they’re not pretty. Investors might not like what they see.