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JPMorgan’s trading desk called the S & P 500 rally to all-time highs perfectly. Now, it’s getting a bit worried. The traders noted Monday that while they maintain their “tactically bullish” stance on stocks — a call they made in August before the benchmark surged to record levels — they do so now “with lower conviction.” They cited the potential for higher inflation and a possible re-escalation in global trade conflict for their softer stance on stock prices. “The combination of public and private company comments on inflation reflect that more tariff-induced cost passthrough is coming, though the speed and magnitude remain unknown. Further, labor supply is declining, and rate cuts may spur labor demand triggering wage inflation which tends to be sticky,” the trading desk wrote to clients Monday. The Federal Reserve is expected to lower rates by at least a quarter percentage point at its policy meeting next week, according to interest rate futures trading collected on the CME Group’s FedWatch tool. Traders are also pricing in two more rate reductions before year-end, after new data released Friday showed further slowing in the labor market last month. .SPX 1M mountain SPX in past month Wall Street will get new inflation figures this week, with the August producer price index due Wednesday and the August consumer price index set for release on Thursday. On trade, JPMorgan’s trading desk thinks tensions could ratchet up again, especially between the U.S., China and the European Union. “We continue to see countries forming regional agreements while also solidifying relations with China. If this persists it may embolden countries to renegotiation/retaliate to the status quo,” the JPMorgan traders said. To be sure, the drivers that took the S & P 500 to record levels still remain in place. Artificial intelligence momentum shows now signs of slowing down, as demonstrated by recent Nvidia and Broadcom earnings. On top of that, earnings growth is expected to stay strong. FactSet data shows analysts expect third-quarter earnings to expand by 7.5% year over year. In the second quarter, profits grew by 11.3% from the year-earlier period. “The markets themselves look pretty good,” Mark Gibbens, president and CIO of Gibbens Capital Management, told me last week. “The economy keeps chugging along, backed by the consumer and business.” “The core trade [in the market] is the AI trade, and that’s not going anywhere,” he added. Near term, however, there are potential headwinds for the market, JPMorgan said. “We have concerns that the September 17 Fed meeting which delivers a 25bp cut could turn into a ‘Sell the News’ event as investors pull back to consider macro data, Fed’s reaction function, potentially stretched positioning, a weaker corporate buyback bid, and waning participation from the Retail investor,” the bank’s traders said.
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