Wall Street is at war with itself over the future of stocks

traders argue face to face

JPMorgan strategists Marko Kolanovic and Dubravko Lakos-Bujas have some varying views on the future of the stock market.
It's a microcosm of the split that is emerging on Wall Street, with some experts — from strategists to hedge fund managers — sounding the alarm over unsustainable market conditions.
Wall Street equity strategists, on the other hand, still see stocks climbing into year-end.

JPMorgan is a house divided ... by the stock market, that is.

In one corner stands Dubravko Lakos-Bujas, the firm's chief US equity strategist. Weighing in with a steadfast focus on rapidly growing corporate earnings, he sees the S&P 500 finishing the year at 2,550, roughly 3% higher than the benchmark's close on Monday.

In the other corner is Marko Kolanovic, JPMorgan's global head of quantitative and derivatives strategy. He's an established industry heavyweight — a man whose opinion is so valued, and whose warnings are so heeded, that he was credited for a sharp market sell-off last week. It came immediately after the publication of a scathing research note that likened the current environment to the one leading up to the 1987 stock market crash.

While it's not entirely uncommon to see two strategists in the same firm hold opposing views on the same subject, the juxtaposition of the two is still jarring. And, it's serving as a handy microcosm for the market: Compelling arguments can be made on both sides of the buy-or-sell debate, and a great deal of nothing is happening as a result.

This is all not to say the two strategists stand in opposition to one another on everything stock market-related — after all, Lakos-Bujas reports to Kolanovic, and they work under the same umbrella. Kolanovic shares his colleague's bullish views on corporate earnings and economic growth — he's just keenly aware of the massive risk to the downside.

Still, warring views throughout the market are offsetting each other, leave stocks more sapped of volatility than at any point in their long history: On Monday the S&P 500 finished almost unchanged, while the Nasdaq and Dow indexes moved in opposing directions.

On the bearish side of the ledger, we've seen recent hang-wringing over the unwinding of the Federal Reserve's balance sheet and dwindling cash stockpiles. The group includes not just Kolanovic but also the chief investment strategist at Bank of America Merrill Lynch and a handful of worried hedge fund managers.

On the other side are many of the equity strategists at Wall Street's biggest firms. In addition to Lakos-Bujas' recent S&P 500 price-target hike, Robert W. Baird's chief portfolio strategist, Brian Rauscher, boosted his to 2,570 around the same time, also citing rising corporate profits.

On Monday, Oppenheimer's chief investment strategist, John Stoltzfus, pumped his year-end S&P 500 price target to 2,650 from 2,450, making him the second-most-bullish analyst on Wall Street, trailing only Mike Wilson of Morgan Stanley.

At the end of the day, Stoltzfus just couldn't get past the robust earnings growth that US companies are enjoying. The S&P 500 is expected to see profit expansion of 8.8% in the second quarter, which would be its fourth straight period of growth. The benchmark's 14% earnings growth last period was the best in more than five years.

On a broader basis, a 20-person group of strategists expects the S&P 500 to finish the year at 2,488, which is less than 1% above Monday's close price, according to a survey conducted by Bloomberg. While that may seem like a meager forecast, ending 2017 in that area might still be considered a success, especially considering some experts are calling for a market top as soon as August.

And while it may be tough to get excited about such a low threshold, many traders would be happy to simply eke out a few more points of gains while warning bells sound.

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