Eventually, “risk markets will have to reconnect with the late-cycle backdrop.”

That’s according to JPMorgan analysts led by Marko Kolanovic, who last week warned that a recession isn’t in the price for equities. The bank pointed at technical flows to explain part of the recent rally, and they’re not wrong.

According to Nomura’s estimates, CTAs have covered 12 of 13 legacy shorts, and are now net long again, after almost $140 billion in buying since last month.

There might be room for more. Even after recent adds, exposure sits in just the 46%ile going back more than a decade.

“Systematic strategies continue to increase equities exposure so far in 2023, revers[ing] last year’s FCI tightening-driven shorts and Underweights,” Nomura’s Charlie McElligott said Tuesday.

Meanwhile, the decline in three-month realized vol helped spur more than $25 billion in added equities exposure from the vol-control universe over the past three months, on Nomura’s data. Overall, vol-control’s equity exposure has almost tripled versus three months ago, but remains relatively low.

“If the current vol compression holds, there would be further substantial buying from vol-control looking out two weeks to a month” assuming stocks stay a semblance of well-behaved, McElligott remarked.

Of course, it’s earnings season and the tech titans will report over that two-week period, starting on Tuesday with Microsoft. If daily swings at the index level average 2% or more, the latent vol-control bid could morph into lurking sell pressure.

For their part, JPMorgan sees the flow drivers running out of gas, and on their view, the fundamentals aren’t supportive. “We anticipate markets struggle with the Fed, disappointing earnings and/or guidance, weak capex and worsening activity momentum,” the bank cautioned.

“With new orders negative, it is difficult to see PMIs in coming months reach a level that would justify the stock performance, and the cyclical and banks rally is at odds with the current PMI trajectory,” they went on to say, adding that “in earlier quarters, we benefited from the relationship between rising PPIs and profitability as corporates could pass on price increases [but] now we face the reverse of that at a time when consumers’ excess savings are exhausted.”