Topline

Fresh off the S&P 500’s brief dive into bearish territory, financial stocks led a stunning market rally on Monday after bullish news from the nation’s biggest lender, but with uncertainty around interest rate hikes posing a still a risk for equities, experts are not breathing a sigh of relief just yet.

Highlights

The Dow Jones Industrial Average climbed 633 points, or 2%, to 31,896 as of 3:30 p.m. ET Monday, while the S&P jumped 1.85% and the tech-heavy Nasdaq 1.4%, preparing the market for its first daily increase in a week.

Leading the Dow Jones and S&P gains, JPMorgan shares – although down 22% this year – jumped 7% after the bank raised its outlook for net interest income this year to 56 billion, down from a forecast of $50 billion in January, due to expectations that the Federal Reserve will raise rates to 3% this year.

“Strong economy, big storm clouds,” JPMorgan CEO Jamie Dimon said Monday at the company’s Investor Day, acknowledging that a recession is possible due to the unprecedented risks posed. by prolonged inflation, geopolitical tensions, and the removal of Fed stimulus measures happening all at once. .

Despite lingering skepticism, JPMorgan’s renewed outlook fueled massive gains for a host of banking stocks, with Citigroup, Bank of America and Wells Fargo up 7%, 6% and 5.5%, respectively.

“It’s too early to turn bullish,” Morgan Stanley analyst Michael Wilson said in an equally bearish tone on Monday, warning that tech stocks, which have led the market lower this year, remain the one of the “biggest risk areas” after retail earnings. last week highlighted a struggling low-end consumer and shrinking profit margins.

“Equity clients are bearish,” Wilson added, saying investors should use any “vicious rally in the bear market” to sell riskier stocks and predicting the S&P will plunge nearly 15% by the end of the month. second-quarter earnings season later this summer.

Key Context

Stocks posted their biggest drop since the Covid-induced stock market crash in early 2020, as investor anxiety swells over impending Fed interest rate hikes. Although historically low interest rates during the pandemic helped fuel one of the strongest bull markets on record, the Fed launched its most aggressive tightening cycle in two decades in March in a bid to calm the inflation, high for decades. “Recession risks are high — uncomfortably high — and growing,” Mark Zandi, chief economist at Moody’s Analytics, said in a weekend note. “For the economy to get through without suffering a downturn, we need very slick policy from the Fed and a bit of luck.”

Contra

“Future returns really improve once stocks are down 20%,” says Ryan Detrick, chief financial market strategist at LPL, who notes that stocks have seen a median gain of almost 24% annually. after the start of a bear market. markets over time, but one thing that has always happened is that stocks eventually returned to new highs.”

To monitor

Stocks will likely bottom when the Fed signals a pause in its tightening campaign, inflation starts to ease, or China’s economy, which slumped this quarter due to strict Covid lockdowns, normalizes, says analyst Tom Essaye of The Sevens Report.

Further reading

Here’s how long it takes stocks to recover from bear markets (Forbes)

S&P 500 dips briefly into bear market as stocks fall for seventh straight week (Forbes)

Here’s the worst-case scenario for stocks, according to Goldman, Deutsche Bank and Bank Of America (Forbes)