JPMorgan says investors shouldn’t get too excited about the stock market’s impressive start to 2023.
“Big picture, we think the equity rally that started last October, which we hoped would be driven by bond yield/CPI highs, China reopening and European gas price declines, is unlikely to provide fundamental confirmation for the leg higher as the year progresses,” closely-watched JP Morgan strategist Mislav Matejka wrote in a note Monday. “Once positioning recovers, Q1 is likely to mark the market’s peak in our view.”
Matejka recommends investors trim their exposure to stocks – which he says are “questionably” highly valued – and look at more areas of market defence. The strategist struck a remarkably cautious tone on tech stocks amid their big rally this year.
“These big positives aren’t ready yet, but they’re clearly not fresh,” added Matejka, “and now a certain complacency is setting in on several fronts.”
The sharp rally in major indices this year has surprised many market observers, especially as the Federal Reserve expects another rate hike as it continues to try to fight nagging inflation.
Several Fed members, including Atlanta Fed Chairman Raphael Bostic to Minneapolis Fed Chairman Neel Kashkari, have warned since the Fed’s last meeting that rates may need to be higher than investors are currently demanding expect.
And while the Fed is widely expected to hold rate hikes this year, the timing is uncertain. That leaves investors staring into the barrel of potentially several more rate hikes that could slow the economy and compress relatively high valuation multiples.
Corporate America, meanwhile, is struggling through a disappointing earnings season that arguably doesn’t justify its 2023 lead.
Big-name companies including Apple (AAPL), Meta (META), Snap (SNAP), Microsoft (MSFT) and Starbucks (SBUX) reported weak fourth-quarter earnings but also offered cautious forward-looking comments.
The story goes on
PepsiCo CFO Hugh Johnston told Yahoo Finance Live last week that he wouldn’t be surprised if the US were to experience a mild recession this year.
“Honestly, we’re coming out of 2022, which was just a stellar year,” Johnston said. “I mean, 14% revenue growth, strong EPS. The company is obviously just firing on all cylinders. We go into the year with good momentum, but also recognize that it could falter at some point in a high yield environment.”
Members of the Wings of Blue parachute team fly in a stacked formation in the American flag before the game between the Air Force Falcons and Navy Midshipmen at Falcon Stadium. Mandatory Credit: Isaiah J. Downing-USA TODAY Sports
JP Morgan’s Matejka ultimately believes the market needs a reality check.
“The market appears to be betting that the new cycle has begun, but there has been no reset on key variables of earnings, jobs, investment and others,” the strategist wrote, adding, “We don’t think companies will be able to do so.” to keep margins at current levels. As PPIs rise, margins are likely to weaken as well. Consumers have used up the excess savings cushion, which has allowed them to absorb price increases relatively painlessly. The outlook for consumers is starting to look more difficult here.”
Brian Sozzi is a freelance writer and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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