JPMorgan has expressed the view that the current stock market rally may not have a lasting future. JPMorgan strategists foresee that the delicate balance between policy challenges and economic growth will persist, influencing investor sentiment as the year comes to a close.

In a note to clients, the analysts stated, “We anticipate that equities will soon return to an unfavorable risk-reward scenario as we approach year-end.”

Several elements contribute to this perspective, such as the anticipation of persistently high-interest rates, reductions in earnings projections, the possibility of diminished pricing influence, challenges to profit margins, and an ongoing slowdown in revenue expansion.

The strategists also underscore that U.S. stock valuations may not be attractive when compared to Treasury real yields. Technical indicators do not signal a bullish trend, indicating that any potential market upturn could be of a restricted duration.

“As the Federal Reserve is poised to maintain a higher interest rate environment in the short term, markets may begin to factor in a policy misjudgment, leading to lower long-term yields in the future. This may not ultimately benefit stocks, particularly if earnings projections for 2024 start to decline,” noted the analysts.

In response, JPMorgan strategists advise investors to explore defensive sectors for potential recovery opportunities, with a specific focus on utilities, healthcare, and staples, which have historically performed well during the last Federal Reserve rate hike in an economic cycle.

They suggest overweighting positions in the insurance, energy, and telecom sectors while underweighting positions in banking, capital goods (excluding aerospace and defense), chemicals, construction, retail, and automotive sectors.

JPMorgan’s position on the technology and mining sectors is considered neutral. The analysts concluded by noting that seasonal trends typically support the market at this time of year, Furthermore, the expected culmination of bond yields may provide temporary respite, yet it may not result in a prolonged recovery.