JPMorgan: VIX Could Unwind Further, US Stocks Are ‘Outright Expensive’

Well, you wouldn’t know it from looking at futs, but some people are still worried that a meaningful pullback in risk assets may be imminent.

As our favorite market cynic (well, “favorite” other than ourselves) Richard Breslow noted in his Monday missive, people are getting a bit freewheeling in their use of the term “risk-off” these days. But be that as it may, one can’t help but get the feeling that “something wicked this way comes.”

Sounding the alarm bells this morning are JPMorgan’s Mislav Matejka and Emmanuel Cau. Here are some excerpts from their latest…

Via JPMorgan

We continue to see the risk-reward for equities as unattractive, given that complacency seen in VIX and in HY spreads could unwind further. EPS momentum is deteriorating, valuations are outright expensive, and liquidity will be turning.

Regionally, so far YTD EM and Eurozone are strongly outperforming, up 23% and 19% respectively, compared to MXWO at 11% in USD terms. We find the direction of USD remains one of the main drivers of regional allocation.

It is fair to say that it is not contrarian anymore to be bearish USD as it has fallen nearly 9% YTD. USD appears to be undershooting the interest rate differential between the US and RoW now. At the same time, the Fed’s rate path might be priced too dovishly in the futures currently, not expecting more than one hike over the next 1.5 years. Given these factors, it might be tempting to call for a more sustained USD rebound.

USD

We stay Neutral US, as further upside potential appears more limited from current levels of elevated P/Es and we believe that the risks to activity disappointing in 2H are material.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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