JP Morgan forecaster issues grim warning about the state of the stock market this year - and it could be cataclysmic

A JP Morgan analyst has warned the stock market could become volatile, despite reaching record highs this year.

The company's chief market strategist Marko Kolanovic issued a note on Monday forecasting that the S&P 500 could fall 20 percent to 4,200 by the end of the year.  

Kolanovic urged investors not to turn bullish despite the Dow Jones Industrial Average hitting 40,000-point for the first time last week - which excited most Americans who have savings accounts and 401(K)s containing funds that are invested in the stock market.

His reasoning is interest rates are likely to stay in restrictive territory for longer, combined with lower-income consumers showing signs of weakness and high levels of geopolitical uncertainty, according to Business Insider.

'With very high equity valuations, we do not see equities as attractive investments at the moment and we don't see a reason to change our stance,' Kolanovic said. 

But he is the exception among big bank analysts, after Morgan Stanley's Mike WIlson - the only other notable bear left on Wall Street - turned bullish at the weekend.

JP Morgan chief market strategist Marko Kolanovic urged investors not to turn bullish despite the Dow Jones Industrial Average hitting 40,000-point for the first time on record last week

The analyst said that third- and fourth-quarter EPS growth will need to accelerate 16 percent compared to the first-quarter for 2024 S&P 500 earnings to meet investor expectations.

'That is unlikely, especially if the recent spell of softer activity data-flow continues,' Kolanovic said. 

He also warned against holding out that developing technology like artificial intelligence could help improve the stock market.

'We don't think that narrow themes like AI chips can compensate for all of those traditional market challenges that historically worked against the cycle,' Kolanovic said.

U.S. stock indexes are drifting around their records on Wednesday, continuing a days-long run of quiet trading.

The S&P 500 was virtually unchanged in afternoon trading, a day after setting its latest all-time high. 

The Dow Jones Industrial Average fell 30 points, or 0.1 percent, as of 12:36 p.m. ET. The Nasdaq composite was mostly unchanged and hovering around its latest record. 

The Dow Jones Industrial Average breached the 40,000-point threshold for the first time ever on Thursday.

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It marked a welcome boost for economists after two years of uncertainty sparked by red-hot inflation and rising interest rates.

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said: 'Breaking the 40,000 barrier is a big psychological boost for the bulls as round numbers hold special significance in people´s hearts and minds.'

Most Americans have at least some of their 401(K) and Individual Retirement Account invested in the Dow Jones, the S&P 500 and the Nasdaq.

Research by the New York Federal Reserve shows the age that workers plan to retire has plunged since March 2020.

Kolanovic issued a note on Monday forecasting that the S&P 500 could fall 20 percent to 4,200 by the end of the year

Today, only 46 percent of Americans under 62 say they expect to work past this age - despite it being three years younger than the traditional retirement age of 65.

In the six years leading up to the pandemic, that figure averaged 55 percent - and have steadily fallen in the four years since.

The trend appears to be driven by a 'cultural shift characterized by a rethinking of the value of work,' as well as a booming stock market which has given households more confidence in their financial health, the Fed said in a research note.

Workers' 401(K)s have benefited from a buoyant stock market in the past year. 

Stocks have been pushed up a red-hot labor market and surprisingly persistent consumer spending in the face of higher interest rates and rampant inflation.

Fed economists said attitudes towards early retirement could be seen as a 'reflection of increased household net wealth; increased confidence about future growth in earnings and income and future financial health; a greater optimism about reaching retirement savings goals.'