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JPMorgan strategists warned investors that divergences continue to increase as equity prices are rising while earnings are falling.
They warn that positioning has “largely normalized,” hence it will no longer act as a tailwind. Similarly, sentiment is “far from negative now,” actually the strategists describe it as “hopeful” given that a recession is not a base case anymore for most.
“The light positioning and the overly bearish sentiment that we were counting on to keep lifting markets in the early part of this year are no longer the case,” the strategists wrote in a client note.
As a result, they believe a 2023 high in equities will occur in Q1 before the period of weakness starts.
“Our core view is that the current activity upswing, helped by the falling gas prices in Europe and by China reopening, is unlikely to develop into a fully fledged acceleration in 2H. After all, the impact of the policy tightening works with a lag, and central banks are far from even pausing, let alone pivoting,” the strategists said.
“We advise to use the Q1 strength in order to reduce exposure. Apart from likely renewed deterioration in fundamentals in 2H, the potential curveballs could come from US politics, US-China relations and geopolitics,” they added.
On the valuation front, Europe is still more attractive than the U.S.
“We continue to believe that International equities will be trading better than the US, given significant valuation discount, among others, and the key drivers that help International more than the US, while Tech on the other hand might not be a great place to position in structurally anymore. This might be the case even if, as we suspect, equities do not hold on to the rally seen over the past months,” JPMorgan strategists concluded.
