The risk of a crisis over the next 6 to 12 months is rising as high rates bite and the stock market's AI rally fades, JPMorgan's quant chief says

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The risk of a crisis over the next 6 to 12 months is rising as high rates bite and the stock market's AI rally fades, JPMorgan's quant chief says
Hollis Johnson/Insider
  • There's a lot that could go wrong in the stock market that investors are not fully appreciating.
  • That's according to JPMorgan's quant chief, Marko Kolanovic, who is worried about high interest rates.
  • "We think there is now a higher likelihood of a crisis over the next six to 12 months," he said.
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The combination of high interest rates and a strong year-to-date stock market rally is putting JPMorgan's chief global market strategist on edge.

In a Monday note, JPMorgan's Marko Kolanovic said that a crisis is brewing in financial markets, and it could lead to a lot of pain over the next six to 12 months.

Kolanovic has been bearish throughout 2023, with his worries driven by rising geopolitical tensions amid Russia's war with Ukraine and China's rocky relations with the US. Additionally, he highlighted that while there are certain lagging effects, the impact of higher-for-longer interest rates is ultimately a negative for asset prices and the broader global economy.

"As both premises for our cautious outlook (rates and geopolitics) turned more negative over the past few months, while positioning and valuations increased, we think there is now a higher likelihood of a crisis over the next six to 12 months, the severity of which could be higher than market participants anticipate," Kolanovic warned.

Tighter monetary policy from the Fed is negatively impacting consumer credit, with delinquency rates on the rise. Meanwhile, commercial real estate has been hit hard by work-from-home trends just before the sector will have to refinance debt at much higher borrowing costs.

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These knock-on effects from higher interest rates should ultimately lead to an increase in market volatility and have a negative impact on employment, according to Kolanovic.

And the AI-fueled rally in the tech sector isn't helping the situation, as it will likely prove to be fleeting for investors. He said expectations that AI will transform the US economy in a short period of time are "unrealistic."

For Kolanovic to turn more bullish on the stock market, he needs to see two things — and they have nothing to do with the promise of AI. Instead, he wants to see interest rates fall around the world, as well as a de-escalation of geopolitical tensions in Russia and China.

But Kolanovic isn't holding is breath.

"Our negative market view is based on seeing a low chance of either of these scenarios materializing near term - in short, we think that developments may first need to get worse before they get better," he said.

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