JPMorgan Desk Turns Tactically Bearish, Sees S&P Dropping To 6,270

For much of the past year, with a brief exception around Liberation Day when they correctly turned bearish ahead of the April event, JPM's market intel desk stuck stubbornly bullish even as its clients turned bearish only to be forced to chase stocks into record highs. Well no more: one week ago, we reported that the Market Intel team turned "Tactically Cautious" as it prepared "for what may be a multi-week period of elevated uncertainty" adding that "the market fall out is likely to trigger de-risking which we feel creates a buying opportunity, should that come to fruition." 

Fast forward to today when the de-risking came much faster than expected,and this morning JPM's Market Intel team turned Tactically Bearish, citing technicals as the primary reason for their downgrade of the market's near-term prospects. 

As Market Intel head Andrew Tyler writes, citing the bank's latest Positioning Intel reports, "there has been a lack of extreme de-risking with positioning currently neutral." Further, as we noted last night, "energy was the most net-sold sector last week as investors took profits into the weekend where, presumably, they were expecting de-escalation." Instead, WTI briefly soared as high as $119, up 30% on the session, before retracing the move. 

In laying out what he expects the market to do next, Tyler writes that the SPX is 3.2% below ATHs and this conflict risks pushing the SPX into a correction (~6270, -10%). 

In terms of energy, Tyler points to the latest war news from this weekend, namely that the US/Iran conflict escalated with oil infrastructure and civilian water supply being targeted, across the region. This means that "Oil prices are poised to stay above $100/bbl and combined with the weak labor report will fuel stagflation fears which should also increase vol across all asset classes."

Tyler also quotes the JPM Commodities trading desk, which recaps what we already know: “There has been a clear escalation with oil infrastructure hit on both sides. Two large refineries now hit with Tehran first and then Haifa being struck in response. Additionally, numerous oil product tanks have been struck in Iran that were being used for domestic use - majority gasoline from what we’re hearing. The precedent of oil infrastructure under attack has officially begun and we believe the products rally seen last week is just starting. Every single day of blockage through the strait creates exponentially larger problems for products down the road.” For reference, after Russia invaded Ukraine on Feb 24, 2022, WTI peaked at $123.70 on Mar 8, 2022 and did not fall sustainably below $100/bbl until late-July 2022. Indicatively, we will shortly highlighted why the JPM commodity analysts now see reduced production from Iraq, Kuwait, and UAE rapidly approaching 4mm barrels per day, a level consistent with $120/bbl oil prices.

Turning back to day-to-day market moves, the JPM trader cautions that SPX options that expire 3/13 imply a 2.9% move this week (6933 or 6547).

Next, Tyler shares some additional thoughts sparked by answering client questions:

• BONDS – Many within Equity space were surprised by the lack of bid to Treasuries last week. JPM traders note that Rates clients entered the week (i) long US front-end; (ii) long swap spreads; (iii) short Rates vol; and (iv) long curve steepeners. Deleveraging caused pain in those trades and exacerbated the moves as oil price spikes triggered bear flattening across DM bond markets. In Credit, the focus among Credit investors at the JPM HY Conference was BDC, CLOs, and Private Credit. The JPM traders flag an analog to Russia / Ukraine war in that clients are going through the iterative process of assessing market impact and longer-term outlook by looking at the first derivative (E&P, LNG exports), second derivatives (Urea / Fertilizer exports), and then third derivative winners / losers (Tire Manufacturers / Butadiene input costs).
• INFLATION – WTI was +35.6% last week, natgas +11.4%, and gasoline +20.2%, which pushed 1Y breakevens +63bp to 4.46%. This increase in inflation expectations is having an impact on Fed expectations with the bond market now expecting 43.5bp of cuts this year, as of Friday, versus 61bps of cuts as of Feb 27. ECB expectations have flipped from 13bp of cuts on Feb 28 to 39.2bp of hikes. This is a situation to monitor as if recent dollar strength reverses, this could add to US inflationary pressure, which has been rising as evidenced by the ISM-Mfg Prices Paid component (printed 70.5 vs. 60.0 survey; 59.0 prior) hitting its highest level since June 2022 when CPI was at 9.1%. This occurs at a time when more tariff price pass-through is occurring. Separately, keep an eye on healthcare premiums given the lack of extension to ACA subsidies (CNBC). 
• MACRO ENVIRONMENT – Tyler writes that last week we saw stronger than expected ISM-Mfg, ISM-Srvcs, and ADP before seeing a weaker NFP print and an in line Retail Sales print. Regarding NFP, JPM Economists say to consider the Feb print in the context of an unusually strong January number. The two-month private payrolls average is 30k vs. 25k for FY25. Ultimately, the move in the unemployment rate (U.3) from 4.32% to 4.44% was expected. 

Yet despite its bearish tactical tilt, the JPM traders do not believe this is the start of a structural bear market and says that a definitive off-ramp to the conflict will end this tactical call as the underlying macro fundamentals remain supportive of risk-assets, although the longer the conflict drags on, the bigger the hit. Here, Tyler notes that JPM's chief economist Michael Feroli sees 26Q1 real GDP growth of 1.75% with elevated oil prices (>$100/bbl) creating ~60bp of downside risk to his forecast.

Finally, this is how JPM would trade its latest bearish tilt:

• Longs in crude, natgas, Energy Equities (esp. E&P and Refiners), and USD.
• Shorts in Expensive Cyclicals, EM Equities, Materials, Staples, and RTY. In terms of pairs, we like +Software vs. -Semis (as people unwind risk we think the performance convergence continues), +IG Credit vs. -Equities, +Mag7 / MegaCap Tech vs. -SPX, +US vs. -RoW.
• Overall, bias to being long Quality names across all sectors with Beta (JPBPURE Index) and Momentum (JPMPURE Index) likely to underperform during this conflict and can act as effective portfolio hedges.
• Some other baskets to consider as tactical longs include Defense (JP2DEF Index), Grocers (JP2GROC Index), Quality L/S (JPQPURE Index), Refiners (JP1BREF Index), Software vs. Semis (JPPQSFSM Index), Stagflation L/S (JP9STAGP Index).

More in the full note available to pro subs.