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J.P. Morgan says stay defensive as stock rally appears to stall

Published 03/11/2024, 09:03 PM
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Investing.com-- J.P. Morgan analysts encouraged investors to adopt a defensive stance towards stock markets, citing "early signs of exhaustion” in a recent risk-on rally and the growing risk of a sharp correction in equities. 

While analysts noted that investor optimism remained high over a “better-than-goldilocks” outcome for the economy, market positioning now appeared skewed towards overbought conditions. 

“Markets are priced for perfection as valuations are rich, and extreme crowding in momentum stocks risks a sharp correction in this factor,” J.P. Morgan analysts said in a note on Monday. 

They noted the recent decline in the NASDAQ Composite from record highs, as well as a sharp fall in the Nikkei 225 as signs that a risk-on rally may now be cooling. 

Analysts also cited increasing risks from geopolitical headwinds, and that inflation appeared skewed to the upside, which could in turn keep global interest rates higher for longer.

JPM analysts said they were underweight on equities and corporate bonds, and were overweight on commodities and cash. Commodities also appeared as a good hedge against long equity exposure, given that stronger commodity prices would factor into higher inflation. 

Wall Street indexes came off record highs over the past two sessions, amid growing uncertainty over the timing and scale of the Federal Reserve’s plans for interest rate cuts this year. 

This spurred similar moves in global equity markets, with Japan’s Nikkei 225 retreating from record highs. Pressure on the Nikkei also came from growing expectations that an interest rate hike from the Bank of Japan- its first since 2007- was imminent.

JPM warns of Nvidia correction

JPM analysts noted that optimism over artificial intelligence had spurred extreme crowding into stocks with exposure to the industry, particularly NVIDIA Corporation (NASDAQ:NVDA).

This made the stock and its AI peers vulnerable to a sharp correction. 

“NVDA has a causal relationship to S&P 500; given this relationship coupled with very bullish investor sentiment and positioning, we caution investors that this relationship is likely to work in reverse when the AI euphoria peaks,” JPM analysts wrote. 

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