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JPMorgan strategist Marko Kolanovic told investors on Monday that they should fade the year-to-date-rally rally as recession risks are merely postponed rather than diminished.
“Fundamental confirmation for the next leg higher might not come, and instead markets could encounter an air-pocket of weaker earnings, activity, and capex,” Kolanovic said in his note. “Last quarter’s investment stall and slowing in hours worked move us closer to an earlier break of business spending, as margins compress and profits contract.”
Kolanovic states that capital goods stocks are likely to face a more challenging backdrop as we move through the year, while JPMorgan anticipates some moderation in Treasury demand. As a result, they “keep tactical shorts in 5Y USTs.”
The strategist adds that a weak trajectory for U.S. domestic demand keeps recession risk elevated, even as the tightness in labor markets postpones this recession risk.
In addition, he believes restrictive real policy rates “represent an ongoing headwind, keeping the risk of a recession later in the year high.”
“By contrast, the modest recession probabilities priced in across risk assets, particularly in Europe, lead us to believe that upside from here is limited,” Kolanovic concludes.
