JP Morgan goes underweight on US stocks

JP Morgan has recommended clients go 'underweight' on stocks and as it sees an eventual recession bringing US stocks down some 30%.

After equities, credit and commodities all rallied in the last three weeks, JP Morgan's global asset allocation team said it felt the "fundamentals of growth, earnings and recession risk have not improved, and if anything have worsened".

With policy makers looking at a "near-empty ammo box", the team's 12-month-out US recession odds have risen to 1/3, while equity implied odds have instead fallen to near 1/5.

Even if no recession materialises, US earnings are seen as rising only by low single digits.

"The strong rebound of the past few weeks does create near-term momentum, and thus keeps our first UW small. Low growth and easy money and the reduced potential for capital gains should raise the demand for income."

JP Morgan's gloabl asset allocation now has a 5% underwight on equities, its first in the cycle, but still likes high-dividend stocks and is 'overweight' defensive sectors.

However the main focus is on US high grade (HG) corporate bonds, given the 4%-plus yield being "a rarity in the HG world".

Credit remains 'overweight' (OW), bonds are moved to 'neutral' and cash to 'OW'. Commodities stay 'UW' but a small -1%, given recent momentum and volatility.

"Given that our risk focus is now switching from Chinese debt to US corporate caution, we go OW EM equities. In Credit, OW US HG, US banks, and sterling HG against EUR and EM. In Commodities, be short gas oil and base metals but OW gold," the team explained.