Cash and gold. What’s not to like?

Amid a grinding rally which took US equities to the top of a familiar range, JPMorgan’s model portfolio has produced losses in three of the last four months, but analysts led by Marko Kolanovic doubled down Tuesday.

“We recommend investors fade the debt ceiling optimism and we adopt a more defensive stance by raising the allocation to cash and gold at the expense of energy, equities and credit,” the bank said.

Kolanovic is hardly alone in eying stocks’ buoyancy with skepticism, and JPMorgan’s six-point rationale was familiar. Importantly, many strategists have now embraced the notion that the liquidity drain+ set to accompany a deluge of post-debt ceiling bill issuance could pose a headwind.

“How much liquidity this will drain from the banking system ultimately depends on who buys the T-bills,” JPMorgan wrote. “[The] prospect of significant liquidity tightening over the summer months would put further pressure on the US banking system as well as on financial assets.”

Earlier this week, Morgan Stanley’s Mike Wilson likewise warned on the risk to stocks from the liquidity headwind. “While a debt ceiling resolution removes a near-term market risk… the bigger risk now is that raising the debt ceiling could decrease market liquidity based on the sizable Treasury issuance we expect over the six months after it passes,” he said.

In the same Monday note, Wilson reiterated his earnings recession thesis, and on Tuesday, JPMorgan expressed a conceptually similar view, noting that earnings merely cleared a lowered bar in Q1. “Outside these hard to interpret surprises versus bottom up analysts forecasts, in our mind the big picture remains that both revenue and earnings growth remain on a downward trajectory,” the bank said.

Below are truncated bullet points from lists of potential headwinds to equities as enumerated by Kolanovic and Wilson.

From JPMorgan:

• The risk of recession remains elevated in our mind and this risk has become even more underpriced by markets as risk assets rallied. The most likely scenario embedded in markets is for “no recession” or a so-called “soft landing.” In our opinion, the US banking crisis is likely to amplify the cumulative impact of the Fed’s previous and current tightening.
• Valuations have become stretched. The earnings per share estimate for the S&P 500 for the full calendar year 2023 has declined to $220 currently from close to $230 at the beginning of the year. This, coupled with the strong rally in US equities YTD, has pushed the year ahead P/E multiple to above 19, above the 10-year average.
• Central banks have on the margin shifted to a more hawkish direction in recent weeks with market pricing of the Fed creeping up.
• China’s growth impulse is fading with April data coming in notably below expectations, thus removing a support for global growth.

From Morgan Stanley:

• There’s a presumption that the banking situation will not worsen. While we don’t think this is 2008-09, we do think the banking situation will accelerate the credit tightening that was already likely to begin by year-end, based on loan officer surveys.
• The war in Ukraine and the situation in Taiwan are not expected to escalate.
• While the consumer has been quite resilient in the face of a number of headwinds, some signs are emerging that this strength may finally be fading. Discretionary spending intentions have slowed according to our recent surveys, even for high-end consumers.