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US consumers have spent all of their excess savings from the pandemic, according to JPMorgan.The bank highlighted the softening of the consumer as one reason why stocks are poised to continue their decline.“Even with a robust labor market, US corporates are seeing demand and prices soften with ongoing margin pressure.”
A weakening consumer is just one reason why the stock market is poised to continue its decline, according to JPMorgan’s Marko Kolanovic.
In a Thursday note, he said consumers have spent down the entirety of their excess savings from the pandemic, which at one point totaled more than $2 trillion. That tailwind is now over, according to the bank, and consumer spending could soften further as student loan payments restart in October.
“Our estimate of excess savings for US households when adjusting for inflation is now fully exhausted from a 2021 high of $2.1 trillion, with risk of widening imbalance if outlays accelerate,” Kolanovic said.
And while there are still elevated levels of household liquidity across cash assets, estimated at $1.4 trillion when adjusted for inflation, that too is at risk of getting fully depleted by May of 2024, he estimated.
“Our concern is whether excess liquidity will even support above-trend consumption for that long,” Kolanovic said. “We remain of the view that lower income cohorts are increasingly coming under pressure with fewer offsets and with little sign of relief from the high cost of capital environment.”
A softening consumer is just one reason why he is preaching continued caution towards the stock market amid its 5% decline, according to the note. Other areas of concern include deteriorating profit margins, high interest rates, and less incentive for stock buyback programs.
“Consensus 2024 EPS growth rate of 12% is a high hurdle for an aging business cycle with very restrictive monetary policy, still rising cost of capital, lapping of very easy fiscal policy, eroding consumer savings and household liquidity, low unemployment rate and increasing risk of a recession for some of the largest economies ahead,” the note said.
Kolanovic highlighted China and Germany as countries at risk of an imminent recession, and the bank still expects the US to enter a recession sometime in early 2024.
Meanwhile, profit margins should stay under pressure “given the lagged effects of monetary policy on demand” as more and more companies utilize promotions and incentives to stimulate demand.
“This erosion in pricing power combined with stickier labor costs and rising interest expense should continue to pressure margins,” Kolanovic said.
Another headwind for the stock market is the fact that rich valuations make buybacks less attractive for companies when they’re funded by debt, he added. That, combined with the new buyback tax, should mean less support for stock prices via repurchase programs.
Kolanovic ultimately expects the S&P 500 to finish the year at 4,200, which represents potential downside of about 4% from current levels.