JPMorgan says this stock market rally is not sustainable

JPMorgan strategists anticipate that the tradeoff between economic growth and policy challenges will persist, impacting sentiment towards stocks as the year draws to a close.

“We believe that equities will soon revert back to an unattractive risk-reward into year end,” the analysts wrote in a note to clients.

The factors contributing to this outlook include the expectation of sustained high interest rates, downward adjustments in earnings projections, potential erosion of pricing power, threats to profit margins, and a continued slowdown in revenue growth.

The strategists also highlight that U.S. stock valuations appear unattractive when compared to Treasury real yields. Technical indicators do not suggest a bullish trend, implying that any market bounce may be short-lived.

“As the Fed is set to remain higher for longer at the short end, markets could start to price in a policy mistake, leading to lower long yields down the line, and that might not ultimately be helpful for stocks, especially if 2024 earnings projections start to reset lower,” the analysts added.

JPMorgan strategists advise that investors should consider defensive sectors for potential recovery, with a focus on healthcare, utilities, and staples, which historically performed well around the last Federal Reserve rate hike in an economic cycle.

They recommend overweight positions in the energy, insurance, and telecom sectors, while underweighting banking, capital goods (excluding aerospace and defense), chemicals, construction, retail, and automotive sectors.

JPMorgan’s stance on technology and mining sectors is neutral.

“We note seasonals are typically supportive at this time of the year, and the likely peak in bond yields is a short-term help, but this might not lead to a sustained bounce,” the analysts concluded.