Another Wall Street strategist says last week’s U.S. stock-market rally will soon fizzle. Here’s why.

“Falling bond yields and the dovish central bank meetings are being interpreted by equity markets as a positive in the near term,” Kolanovic said.

“However, we believe that equities will soon revert back to an unattractive risk-reward as the Fed is set to remain higher for longer, valuations are rich, earnings expectations remain too optimistic, pricing power is waning, profit margins are at risk and the slowdown in topline growth is set to continue,” he added.

Stocks rose sharply last week after the Federal Reserve signaled it might be finished hiking interest rates as rising Treasury yields have helped tighten financial conditions, effectively doing some of the Fed’s job for it.

Hopes for Fed interest-rate cuts next year received another boost on Friday, when the October jobs report showed only 150,000 jobs were created last month, fewer than the 170,000 that economists polled by The Wall Street Journal had expected.

Investors have recently cheered survey data and other gauges, like the Federal Reserve’s latest Beige Book, that hint at slowing economic growth and possibly lower inflation. While that might seem counterintuitive to some, it’s driven by the logic that a modest economic slowdown would ultimately be good for markets by pushing the Fed to pivot back to cutting interest rates, helping to boost equities’ attractiveness relative to bonds and cash.

But according to Kolanovic, the so-called “bad news is good news” dynamic driving markets is fraught with risk. Outside of a certain narrow range, the risks to stocks from a slowing economy would likely begin to outweigh the potential benefits.

“The ‘bad news is good news’ zone may be quite narrow, as it is difficult to distinguish between a healthy slowdown and the initial stages of recession without the benefit of hindsight,” Kolanovic said.

Perhaps exacerbating risks for stocks would be a Fed policy “mistake”, that is, the central bank keeping interest rates higher for longer than they probably should have. The resulting recession and hit to corporate earnings growth could create serious problems for stocks.

“As the Fed is set to remain higher for longer at the short end, markets could start to price in a policy mistake, leading to lower long yields down the line, and that might not ultimately be helpful for stocks, especially if 2024 earnings projections start to reset lower,” Kolanovic said.

The JPMorgan analyst, who was nicknamed “Gandalf” by the financial press due to a series of prescient calls, isn’t the only major Wall Street figure to doubt last week’s rally.

Michael Wilson, who previously acted as Kolanovic’s foil as stocks dropped in 2022, said earlier this week that he expected this rally could soon fizzle as investors revisited expectations for torrid corporate earnings growth in 2024.

See: Rally will fizzle out in a week or two, Morgan Stanley strategist Wilson says

U.S. stocks surged last week, with the Nasdaq Composite
COMP,
S&P 500
SPX
and Dow Jones Industrial Average
DJIA
all logging their biggest advance of the year as Treasury yields and the U.S. dollar sank.

Bulls were especially heartened by signs that the rally was broad based, with both unprofitable technology stocks like those included in the Ark Innovation ETF
ARKK
and once-troubled regional banks posting double-digit gains.

Small-cap stocks as represented by the Russell 2000
RUT
also logged their biggest gain since 2021 and outperformed the highflying Nasdaq Composite, a rare occurrence that spurred hopes that unloved segments of the market might be seeing fresh signs of life.