3 catalysts could spark a 10% sell-off in the stock market this summer, according to JPMorgan

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  • The S&P 500 could drop 10% over the summer months to 4,800, according to JPMorgan.
  • The bank highlighted three catalysts that could drive a decline.
  • The May jobs report could spark a bearish narrative change in the stock market.

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A 10% sell-off in the stock market is possible this summer after a massive year-to-date rally, according to JPMorgan.

The bank’s trading desk said in a recent note that the S&P 500 could test the 5,000 level as support and potentially fall below with a decline of as much as 10%. That would put the index at about 4,800.

According to the trading desk, there are three big catalysts that could drive such a sell-off.

“Buyer’s exhaustion”

The recent performance of stocks during earnings season suggests potential equity buyers are getting exhausted.

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The bank highlighted that companies that beat first quarter earnings expectations underperformed the S&P 500 while companies that missed expectations were punished.

“The combination of earnings season stock performance and narrowing market breadth points to a market that needs a new set of catalysts and/or reassurance about the prevailing market narrative,” JPMorgan said.

That means merely in-line macro data and a cautious Fed could drive investors to the sidelines during second-quarter earnings, which begin in mid-July.

“Momentum unwind”

The bulk of the stock market’s recent gains have been driven by momentum, with tech stocks leading the advance.

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However, if momentum falters, there could be a larger unwind that drives stock prices lower.

“The key to watch is the short leg of momentum. If that falters, it would trigger a larger degrossing as part of that momentum unwind. That chain reaction is what could lead to a 5% – 10% pullback,” JPMorgan said.

“Macro data disappointment”

The re-emergence of a stagflation or recessionary narrative would kill hopes of a soft landing in the economy and likely drive stock prices lower.

That narrative change could happen on Friday with the May jobs report.

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JPMorgan said a jobs report below 50,000 to 75,000 range or above the 250,000 to 300,000 range could spark a narrative change and hurt stock prices.

Current economist estimates suggest about 190,000 jobs were added to the economy in May.