“Markets often bottom before the end of a recession, but not before the beginning of one,” JPMorgan analysts led by Marko Kolanovic said Monday. The emphasis was in the original.

Kolanovic, who turned cautious late last summer amid concerns around the potential for over-tightening from central banks and worsening geopolitical tensions, remains skeptical of risk assets. JPMorgan’s model portfolio still reflects an Underweight in equities and an Overweight in cash.

Editorializing around that juxtaposition, Kolanovic noted that with yields on short-term US government paper loitering near 5%, the risk-reward “heavily favors cash” given that stocks have re-rated to between ~19x and ~20x.

At best (i.e., assuming full-year, index-level earnings are in line with consensus), US equities are priced to perfection. So, regardless of whether you think equities should still trade with a so-called “21st century multiple,” stocks aren’t a bargain unless you make some pretty optimistic assumptions about EPS beats from here.

Some argue the new macro regime (ushered in by COVID, the war in Ukraine and the subsequent forced abandonment of ultra-accommodative monetary policy in the face of generationally high inflation) means stocks should de-rate and reset to a permanently lower multiple. But, again, even if you don’t buy that, 20x isn’t cheap.

Although JPMorgan conceded it’s “worrisome” for bears that stocks were quick to move on from regional bank drama ahead of an expected Fed pause, they cited three factors which keep them confident in an equity Underweight. One is poor breadth, another is the low VIX and the third relates to the notion that tech is effectively telegraphing a very large drop in bond yields, which the bank thinks is unlikely to materialize, or at least not on the scale seemingly necessary to justify recent tech outperformance.

“With the Tech sector hitting nosebleed valuations last seen in the first internet bubble, the market is effectively implying… that we will get to a 10-year yield of ~1.5%,” JPMorgan remarked. “We agree that yields can go much lower [but] this will continue to be a challenging environment for businesses relying on ‘lower for longer’ when central banks are still emphasizing their commitment to fighting inflation and pushing back on market expectations for cuts.”

Panning back out to the 30,000-foot level, Kolanovic made a compelling case Monday, particularly if you think there’s elegance in simplicity. “Even in an optimistic scenario of [a] soft landing, equity upside is likely less than 5% and that is the return that is delivered by short-term fixed income,” Marko said, while gently reminding investors that although hope springs eternal, the March FOMC minutes did find staff penciling in a shallow recession later this year.

As for the downside, suffice to say that even if any recession is mild, an economic contraction would likely entail a meaningful correction for risk. Specifically, Kolanovic said a US downturn would “warrant retesting the previous lows and result in 15%+ downside.”

In that scenario, the case for cash is obvious. “Short-term fixed income provides not only full protection on the downside but also optionality to buy risky asset classes should [a] pullback happen,” Marko wrote Monday.

Never forget: Cash is just a de facto ATM put.