JPMorgan strategists remain adamant that the ongoing rally in equities is largely overdone. They reminded the firm’s clients that the level and increase of stock concentration in the S&P 500 now is at 60-year highs.
The market is too optimistic and is now pricing in “macroeconomic scenarios that are even more positive than a soft landing," they wrote in a client note.
“We maintain that this market action is largely a result of mechanical re-risking, due to the decline in volatility and emergence of the AI-themed megacap rally,” strategists wrote.
The weak breadth in the S&P 500 rally “could be indicative of a bubble” while “other anecdotal evidences point to an AI-driven bubble as well.”
“While we think AI has been and will continue to be a transformative technology (and we have followed and applied it in our research for over a decade, the current hype was triggered by popularization of chatbots that often fail in basic questions and occasionally fabricate wrong answers to more complex questions,” strategists added.
Along these lines, they reiterated their earlier stance that market declines will follow with the return of market volatility.
“We acknowledge that we cannot time this inflection near term, but there are no data points that would prompt us to change our methodology or conclusions,” the strategists concluded.