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As global financial conditions have surprisingly improved and with the market bracing itself for anticipated rate cuts, concerns loom around certain stocks that may be at risk if the Federal Reserve decides to maintain higher rates for a prolonged period.
According to a recent JPMorgan Equity Strategy report, published on Friday, the prospects of easier monetary policy extending the economic cycle could come with detrimental repercussions. “While easier monetary policy could extend the cycle, it is also likely to come at a cost of ‘higher for longer’ re-asserting itself at a time when equity positioning has significantly increased, and valuation has re-rated back to levels when short-term rates were close to zero,” analysts wrote.
The report points to recent data, including CPI, jobless claims, and retail sales, as well as shipping disruptions, suggesting that equities could face substantial risk in the event of a dovish Fed. Market consensus, which leans towards a “soft landing scenario,” may be at odds with the potential consequences of a “higher for longer” backdrop, with equity valuations at risk and a likely sharp rotation in stock leadership. This could trigger a reversal in high-beta, illiquid, low quality/weak balance sheet, unprofitable, and small-cap stocks that have been outperforming over the past two months. Subsequently, this would result in a reversal of the short-term momentum factor, reinforcing the long-term momentum crowding trend with the looming risk of even more extreme concentration.
Stocks Most Vulnerable to the Dovish Fed:
- Victoria’s Secret & Co. (VSCO) – Performance Dec. 31 – Nov. 13: -48%, Performance Nov. 13 – Jan. 18: 24%
- Harley-Davidson Inc. (HOG) – Performance Dec. 31 – Nov. 13: -35%, Performance Nov. 13 – Jan. 18: 24%
- Bath & Body Works Inc. (BBWI) – Performance Dec. 31 – Nov. 13: -29%, Performance Nov. 13 – Jan. 18: 43%
- Mister Car Wash Inc. (MCW) – Performance Dec. 31 – Nov. 13: -29%, Performance Nov. 13 – Jan. 18: 26%
- Crocs Inc. (CROX) – Performance Dec. 31 – Nov. 13: -29%, Performance Nov. 13 – Jan. 18: 30%
- Mohawk Industries Inc. (MHK) – Performance Dec. 31 – Nov. 13: -22%, Performance Nov. 13 – Jan. 18: 25%
- First Horizon Corp (FHN) – Performance Dec. 31 – Nov. 13: -53%, Performance Nov. 13 – Jan. 18: 21%
- Comerica Inc. (CMA) – Performance Dec. 31 – Nov. 13: -39%, Performance Nov. 13 – Jan. 18: 27%
- KeyCorp (KEY) – Performance Dec. 31 – Nov. 13: -38%, Performance Nov. 13 – Jan. 18: 21%
- …and many more
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