JPMorgan stays bearish on the stock market and warns that an AI bubble is brewing amid record concentration in mega-cap stocks
- JPMorgan's Marko Kolanovic is staying bearish on the stock market despite its strong rally.
- He warned the hype around artificial intelligence is creating a new bubble.
- These are three catalysts that Kolanovic expects will drive a sell-off in the stock market.
JPMorgan's Marko Kolanovic is unfazed by the S&P 500's strong rally since its mid-October low and is reiterating his bearish view on stocks.
In a Monday note, he warned that the hype around artificial intelligence is brewing a bubble in the stock market that probably won't end well for investors. The bubble is evidenced by the fact that stock concentration in the S&P 500 is at 60-year highs, as the top seven companies make up more than 25% of the index.
That concentration was particularly strong in the Nasdaq 100, which was recently forced to undergo a special rebalance after the mega-cap tech companies made up more than 50% of the index.
"This could be indicative of a bubble, and other anecdotal evidences point to an AI-driven bubble as well," Kolanovic said.
He is a believer in AI technologies but doesn't think they're ready for prime time in their current form as chatbots, given that they "often fail in basic questions and occasionally fabricate wrong answers to more complex questions."
While the AI bubble keeps raging on, Kolanovic is focused on three bearish catalysts that could ultimately upend the stock market rally and lead to a sizeable sell-off.
"We remain of the view that the delayed impact of the global interest rate shock, steady erosion of consumer savings and post-COVID pent-up demand, and deeply troubling global geopolitical context will result in market declines and re-emergence of market volatility," he said.
While admitting there's no way to time the potential negative inflection point for markets, Kolanovic said "there are not data points that would prompt us to change our methodology or conclusions."
He recommends investors purchase commodities, as they "stand out as under-valued, under-owned, and [are] backed by compelling fundamentals and technicals," according to the note.
Kolanovic isn't the only bearish Wall Street strategist who is sticking to his view that stocks are likely to fall.
Morgan Stanley's Mike Wilson said on Monday that he was wrong about his bearish stance, but he reiterated a bearish price target outlook for the S&P 500 and said cooling inflation could hurt stock prices.
Both strategists have been bearish for much of the stock market rally that began late last year.