How far might stocks rally if investor equity allocations rose to levels consistent with those observed on the eve of the financial crisis or, even more provocative, if global investors’ stock allocation reached the dot-com-era peak?

That’s another way of approaching the more generalized question market participants find themselves pondering on a daily basis in 2024. Namely: Where’s the top in the event the current US equity melt-up morphs into a dot-com-esque bonanza?

In a note dated February 15, JPMorgan’s Nikolaos Panigirtzoglou leveraged the bank’s framework for estimating the equity allocation of non-bank investors globally in suggesting that a return to the 1999 peak would almost surely entail a fairly dramatic increase in stock prices.

That seems obvious to the point of being tautological, and in a way it is, but note that the metric is a give and take: You need to conduct a sensitivity analysis with bonds and cash in order to answer the question(s).

Panigirtzoglou noted, for example, that because cash allocations using the same framework are “already marginally below their 2007 troughs,” the best way to assess the situation is to calculate “how much equities would have to rise, or bonds decline, for their respective weights to reach their 2007 levels.” If stocks did all the work, they’d have to rise 12%. If, on the other hand, the burden of the adjustment fell solely on bonds, they (bonds) would have to plunge 23%. As Panigirtzoglou pointed out, that seems exceedingly unlikely.

Another possibility is that stocks and bonds split the difference, with equities rising 6.5% and bonds suffering a 16% drawdown, equal to around 240bps. That’d lift the model-implied equity allocation to pre-GFC levels while keeping implied cash allocations static.

And yet, even a 16% selloff for bonds seems far-fetched (or at least one hopes so given that we’ve just been through such a selloff in 2022 and it wasn’t especially enjoyable). The implication, as Panigirtzoglou wrote, is that “any increase in equity allocations to the previous 2007 peak would have to come mostly from a large appreciation in equity holdings rather than a reduction in bond or cash holdings.”

As for the 1999 peak (around 54%, as illustrated by the figure above), Panigirtzoglou gently noted that ceteris paribus, stocks would have to rise by nearly a third (32%) from current levels.

Even if bonds plunged 30% to take allocations back to the late-90s trough (and keeping cash allocations unchanged), a return to that year’s equity allocation levels would entail a 16% stock rally.

But bond yields aren’t going to rise the 470bps implied by that hypothetical 30% drawdown which, again, means that “any increase in equity allocations to the previous 2000 peak would have to come mostly from a very large increase in equity prices,” as Panigirtzoglou put it.

JPMorgan was the most bearish bank on Wall Street when year-ahead outlook pieces were released three months ago. Dubravko Lakos-Bujas’s original year-end S&P target for 2024 was 4,200.

“In all, our central case remains that equity upside is limited from here, constrained by the fact that investors’ equity allocation globally is approaching the post-Lehman high seen in early 2015,” Panigirtzoglou went on. “At the same time, we recognize that a further increase in equity allocations to the previous 2007 cycle peak is neither an unlikely scenario nor an unreasonable assumption.”