S&P 500 could plunge to 3200 in coming months, JPMorgan warns after Powell's speech

By Senad Karaahmetovic

The S&P 500 lost over 1.5% yesterday as Fed Chair Jerome Powell told the Senate Banking Committee that the terminal fed funds rate “is likely to be higher than previously anticipated.”

The FOMC, which is due to meet later this month, could be “prepared to increase the pace of rate hikes” if the U.S. data continues to show that such a trajectory is warranted, Powell said.

In their December estimate, the FOMC saw the terminal rate at 5.1%. The current market pricing is now moving higher to a range of 5.5-5.75% in the aftermath of Powell’s remarks.

As a result, equities are heading in the opposite direction as the yield curve is hitting new cycle lows.

“We believe a break through the 3900 inflection can lead to accelerated selling pressure, as that area has acted as a bifurcation for the index from May 2022. It also currently aligns with several trend-following trigger levels for momentum-based strategies. We see the 3760- 3764 area as an initial target for a breakdown,” JPMorgan technical strategists wrote in a client note.

The strategists expect the S&P 500 to retest this cycle’s lows in the first half of this year.

“We think the probability for a deeper S&P 500 Index slide to next support near 3200 and a bottom later within the first half of 2023 has increased,” they added.

Here is what other Wall Street strategists have to say about Powell’s speech yesterday.

Goldman Sachs: “We expect the data ahead of the March meeting to be mixed but firm on net, and we therefore see our standing forecast of a 25bp hike in March as a close call, with some risk that the FOMC could hike by 50bp instead. Whether the FOMC hikes by 25bp or 50bp, we expect that the median dot will rise by 50bp at the March meeting to show a peak rate of 5.5-5.75% in 2023. We have raised our own forecast of the peak rate by 25bp to 5.5-5.75% as well.”

Morgan Stanley: “Chair Powell's prepared remarks for his semi-annual testimony opened the door to a return of 50bp hikes at the March meeting if the incoming data flow warrants it. Upside surprises to Friday's payroll report could drive a faster and longer tightening cycle.”

Bank of America: “For now, we retain our view that the Fed is likely to hike by 25bp in March. We have argued that the bar is likely high for a return to a faster pace of rate hikes. In our view, risk management concerns support staying at slower pace of rate hikes and monetary policy does work with “long and variable lags”… That being said, a reversion to 50bp hikes is data-dependent.”

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