JPMorgan’s Kolanovic Cuts Equity Allocation Again on Growth Risk

(Bloomberg) — JPMorgan Chase & Co. strategist Marko Kolanovic reiterated Tuesday that he sees downside risk for the stock market in the first quarter, with the bank reducing its recommended equity allocation once again due to fears of a recession and central bank overtightening.

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The bank strengthened its underweight call for equities broadly and in the euro area specifically, given the recent outperformance of the region’s stocks, while staying overweight on emerging markets and China equities.

“We remain cautious on risk assets and are reluctant to chase the past weeks’ rally as recession and overtightening risks remain high, and we believe that a lot of good news is already in the price in terms of inflation moderation or the potential for a soft landing,” a team of strategists led by Kolanovic wrote in a note to clients.

One of Wall Streets biggest optimists through most of the market selloff last year, Kolanovic has since reversed his view, cutting his equity allocation in mid-December due to a soft economic outlook this year.

He maintained Tuesday that the current stock-market rally will start fading through the first quarter and that investors should “be using potential gains over the next weeks to reduce exposure.”

“The market is behaving as if we were in an early cycle recovery phase, but the Fed has not even concluded hiking yet,” Kolanovic wrote. “While signs of declining inflation pressures are in principle positive, ongoing tightness in labor markets is likely to put pressure on margins, and may cause central banks to tighten further than markets expect.”

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Kolanovic’s baseline forecast is that the US will fall into a recession at the end of 2023, with inflation gradually normalizing and the Federal Reserve cutting rates in early 2024.

The bank remains bullish on commodity stocks and anticipates that bond yields have likely peaked, which suggests better performance of defensive and growth equities, Kolanovic wrote.

Of course, most of the strategists calls didn’t work out last year, with his previous S&P 500 price target on the S&P 500 of 4,800 ending up 25% higher than where the benchmark closed 2022. The bank’s 2023 year-end target for the S&P of 4,200 suggests a 5.2% gain from where it currently stands. Kolanovic, however, did urge investors to buy the dip in China equities during their October downturn. The MSCI China index has gained more than 25% since early October.