S&P 500 earnings estimates for 2024 are overly optimistic, JPMorgan's quant guru says

• Stock market investors are about to be disappointed as earnings growth estimates are too high.
• That's according to JPMorgan's quant guru Marko Kolanovic, who recommends an underweight position in stocks.
• "Weakening PMI momentum suggests that Q3 earnings growth is likely to be negative," Kolanovic said.

The stock market is poised to disappoint investors over the coming months and into next year because S&P 500 earnings growth estimates are too optimistic, according to JPMorgan's quant guru Marko Kolanovic.

Kolanovic recommended investors stay underweight stocks and increase their bond allocations because the combination of disappointing earnings growth and elevated valuations could put downward pressure on stock prices.

"Still-rich equity valuations face increasing risk from high real rates and cost of capital, while earnings expectations for next year appear overly optimistic," Kolanovic said in a Monday note. "Weakening PMI momentum suggests third-quarter earnings growth is likely to be negative."

Wall Street consensus expects S&P 500 earnings per share to deliver 4% year-over-year growth in the third-quarter, according to the note.

"These projections appear undemanding at face value, but, in contrast to [the] first half, when most activity metrics were on an improving trend, the PMI momentum softened in [the] third-quarter," Kolanovic explained.

Kolanovic doesn't expect much to change in 2024, arguing that Wall Street analysts are still too optimistic about the potential for earnings growth. Consensus estimates suggests that the S&P 500 will grow its earnings per share by 12% next year.

"Beyond potentially weaker volumes, driven by decreasing PMIs, we believe corporate pricing is likely softening. Weaker pricing at the time of elevated input costs such as wages and rates could lead to a margin squeeze," Kolanovic said.

Meanwhile, a weakening consumer could also limit potential for an upside surprise in earnings.

"Delinquencies in consumer loans and corporate bankruptcies are starting to move higher, and this trend is likely to continue absent a cut in rates," Kolanovic said.

And interest rate cuts don't appear likely in the near-term, given that the Federal Reserve appears committed to the rates staying higher for longer.

Kolanovic said that lags in the impact of high rates are taking longer to materialize, and that most of the negative effects from the Fed's aggressive interest rate tightening are still to come. This dynamic should accelerate once more companies have to raise or refinance their long-term debt.

Kolanovic is sticking by his year-end S&P 500 price target of 4,200, pointing to potential downside of 4% from current levels.