Last week, Bank of America presented 4 reasons why it finally threw in the towel on its long-held bullish small-cap trade reco, among which valuations, growth and confidence, credit and volatility. Today, JPMorgan’s equity strategist Mislav Matejka similarly called for a near-term top in the market, saying key positive catalysts for equities are over for now, and recommended investors use any further near-term strength as opportunity to cut exposure to asset class.
Specifically, the JPM equity team notes that while “the big picture supports for stocks remain in place” the banks warns that “the near-term risk-reward might be getting less exciting. Some of the positive catalysts we have been looking for, such as a robust earnings season and the easing in political tail risks, have delivered and are now behind us.”
At the same time, JPM warns that the six red flags have emerged for future risk upside:
As demonstrated yesterday, the Citigroup’s economic surprise index has entered negative territory. CESI has a good correlation with the S&P 500 and points to 10%+ downside for stocks – see page 9. US loan growth is weaker. Eurozone M1,an important lead indicator, points to lower PMIs, as well. Additionally, China new project starts have collapsed.
Sentiment is getting complacent, with SX5E in overbought territory and VIX back to record lows. Cyclicals vs Defensives are now overbought, as are Banks.
Summer seasonals are negative. In the past 40 years, equities tended to post their best returns in April, but May onwards would see the worst returns.
Bond yields bounced recently, but are struggling to break out of their ytd range.
Commodity prices are weaker, specifically iron ore and Brent. This is a problem for reflation trade => inflation prints could roll over meaningfully, as could Chinese PPI, which has implications for Chinese corporate profitability – see charts on page 17. Inflation forwards are back to November levels.
Italian political concerns could retake centre stage earlier than consensus assumes
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