JPMorgan’s Kolanovic cuts stake again due to upside risk

(Bloomberg) — Strategist at JPMorgan Chase & Co. Marko Kolanovic reiterated on Tuesday that he sees downside risk for the stock market in the first quarter as the bank again cuts its recommended capital allocation on recession fears and over-tightening by the central bank.

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The bank reinforced its underdemand for equities in general and the euro area in particular, given the recent outperformance of the region’s equities, while maintaining excess demand for emerging market and Chinese equities.

“We remain cautious on risky assets and do not want to chase the rallies of recent weeks as recession and over-tightening risks remain high and we believe there is already a lot of good news in price in terms of decelerating inflation or the potential for a soft landing.” , the team of strategists, led by Kolanovic, wrote in a note to clients.

Kolanovic, one of Wall Street’s biggest optimists who survived most of last year’s market sell-offs, has since changed his mind, cutting his stock allocation in mid-December due to the mild economic outlook this year.

On Tuesday, he said the current stock market rally will begin to fade in the first quarter and that investors should “take advantage of potential gains in the coming weeks to mitigate risk.”

“The market is behaving like we are in the early phase of a recovery cycle, but the Fed hasn’t even completed the rally yet,” Kolanovic wrote. “While signs of declining inflationary pressures are generally positive, continued tightness in labor markets is likely to put pressure on margins and could lead central banks to tighten more than markets anticipate.”

Read more: MS’s Wilson says US stock investors are not prepared for falling earnings

Kolanovic’s baseline forecast is that the US will enter recession in late 2023, inflation will gradually normalize, and the Federal Reserve will cut rates in early 2024.

The bank remains bullish on commodities and expects bond yields to likely peak, suggesting stronger defensive and growth stocks, Kolanovic wrote.

Of course, most of the strategists’ predictions didn’t pan out last year, as his previous S&P 500 price target for the S&P 500 of 4,800 was 25% higher than its end-2022 benchmark. The bank’s end-2023 target for the S&P at 4200 is 5.2% up from its current value. However, Kolanovic urged investors to buy Chinese stocks during the October downturn. The MSCI China Index is up more than 25% since early October.

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