Marko Kolanovic, chief global market strategist at JPMorgan, said recently that weak consumption will be one of the reasons for the continued decline of the US stock market. As we all know, consumer spending is the "strongest pillar" of the US economy.
He said in a newly released report that consumers have spent all of their excess savings from the pandemic, which once exceeded $2 trillion. The bank said that tailwind is now over and consumer spending is likely to slow further as student loan payments restart in October.
Federal student loan payments have been suspended for more than three years. With the Supreme Court ruling on President Biden's student loan relief, loan payments will restart in October and interest will accrue again in September.
“We estimate that U.S. households’ excess savings have now been fully depleted from a peak of $2.1 trillion in 2021, adjusted for inflation, and the imbalance could widen if spending accelerates,” Kolanovic said.
He estimates that while liquidity levels in household cash assets remain high, at an estimated $1.4 trillion adjusted for inflation, they could be completely depleted by May 2024. And according to new research released this week by the San Francisco Fed, those excess savings could even be depleted this quarter.
"Our latest estimates suggest that total excess savings held by households amounted to less than $190 billion in June. There is considerable uncertainty about the outlook, but we estimate that these excess savings could be exhausted by the third quarter of 2023," the San Francisco Fed wrote in a blog post.
“Our concern is whether excess liquidity can support above-trend consumption for that long,” Kolanovic said. “We continue to believe that lower-income groups are increasingly coming under pressure, but there is less offsetting funding and no signs that the high-cost funding environment has eased.”
It also said consumer weakness was just the latest reason for his call for continued caution as U.S. stocks fell 5%. Other concerns include deteriorating profit margins, high interest rates and reduced incentives for stock buyback programs.
“The consensus EPS growth estimate of 12% to 2024 is a high hurdle for an increasingly ‘aging’ business cycle, with very tight monetary policy and still-elevated funding costs, shocks to very loose fiscal policy, erosion of consumer savings and household liquidity, low unemployment, and increasing risks of future recessions in some of the largest economies,” the report reads.
Kolanovic still expects the U.S. to fall into recession sometime in early 2024. He estimates the S&P 500 will close the year at 4,200, a potential drop of about 4% from current levels.
“As more companies use promotions and incentives to stimulate demand, margins should remain under pressure given the lagged effects of monetary policy on demand. Erosion of pricing power, coupled with rising labor costs and higher interest expenses, should continue to weigh on margins,” he wrote.