JPMorgan says investors shouldn’t get too comfortable with the stock market’s impressive start to 2023.
“Big picture, we believe that the equity rally that started last October, and that we hoped would be driven by peaking bond yields/CPI, China reopening, and the fall in European gas prices, is unlikely to get the fundamental confirmation for the next leg higher as the year progresses,” closely-watched JP Morgan strategist Mislav Matejka wrote in a note on Monday. “Once the positioning recovers, Q1 is in our view likely to mark the high point of the market.”
Matejka recommends investors slash their exposure to stocks — which he says sport “questionably” high valuations — and eye more defense areas of the market. The strategist struck a notable cautious tone on tech stocks amid their big rally out of the gate this year.
“These big positives are not finished, but are clearly not fresh anymore,” Matejka added, “and now there is some complacency setting in on multiple fronts.”
The strong rally across the major indices so far this year has surprised many market watchers, especially given that the Federal Reserve is hot off another interest rate hike as it continues to try and combat nagging inflation.
Several Fed members, including Atlanta Fed President Raphael Bostic to Minneapolis Fed President Neel Kashkari, have come out since the last Fed meeting with warnings rates may have to head higher than investors currently expect.
And while the Fed is widely expected to pause its rate increases this year, the timing is uncertain. That leaves investors staring down the barrel of potentially multiple more rate increases that could have the effect of slowing the economy and compressing relatively elevated stock valuation multiples.
Corporate America, meanwhile, is slogging through a disappointing earnings season that arguably doesn’t justify the market’s 2023 advance.
Big household name companies such as Apple (AAPL), Meta (META), Snap (SNAP), Microsoft (MSFT) and Starbucks (SBUX) posted weak fourth quarter earnings while also offering cautious forward-looking commentary.
PepsiCo CFO Hugh Johnston told Yahoo Finance Live last week that he wouldn’t be surprised if there was a mild recession in the U.S. this year.
“Frankly, we are coming out of 2022 which was just an outstanding year,” Johnston explained. “I mean, 14% revenue growth, strong EPS. Obviously, the company is just firing on all cylinders. We have good momentum coming into the year, but we are also aware of the fact in a high-interest rate environment it could start to drag at some point.”
JP Morgan’s Matejka ultimately thinks the market needs a reality check.
“The market appears to be betting that the new cycle has started, but there was no reset in the key variables, profits, labour market, capex and other,” the strategist wrote, adding: “We do not believe that companies will be able to sustain margins at current levels. As PPIs roll over, margins are likely to weaken, too. Consumer has burned through the cushion of excess savings, which allowed them to absorb the price increases relatively painlessly. Consumer outlook is starting to look more challenged from here.”
