“Investors’ pessimism is rising.”

So said JPMorgan analysts led by Marko Kolanovic on Monday.

It’s true. Investors are feeling a little glum right now, what with the S&P all but guaranteed to post a third straight monthly loss thanks in no small part to an epochal Treasury selloff that’ll be forever enshrined in the annals of market history.

Individual investor sentiment recently erased the entirety of the Nvidia/debt ceiling deal rebound.

Kolanovic on Monday echoed familiar worries around small-caps and cyclicals. The former are underperforming severely as tighter financial conditions brought on by higher yields raise concerns about an eventual credit-cycle turn.

“The gap between the S&P 100 and the S&P 600 Small Cap index widened to the highest level since the peak of the pandemic crisis,” Marko and co. wrote. “This extremity points to heightened aversion by investors.” The figure on the left, below, illustrates the point.

If you ask JPMorgan, “retail investors are at least partly behind recent equity market losses.”

The bank also pointed to buoyant bullion “which appears to have decoupled from its traditional negative correlation with 10-year real yields.” Gold is, of course, negatively correlated with reals. If reals are rising, gold should be selling off. If it isn’t, something’s amiss. “The decoupling of gold prices from rising bond yields is implying flight to safety behavior,” JPMorgan said.

To be sure, Kolanovic conceded that the incoming data and earnings don’t exactly scream “recession.” “The timing of an eventual recession has become more uncertain following the unexpected strength of the September US payroll report and, if anything, the strength of Q3 US GDP growth suggests the timing of a recession could be pushed back towards the end rather than the beginning of 2024,” he said, adding that Q3 reporting season, “is so far also consistent with the idea that a recession-like contraction in earnings is far off in the US.”

And yet, the bank isn’t abandoning its generally cautious view, which Marko summed up in three short sentences. To wit:

We expect both demand and pricing power for corporates to soften, while interest expense and charge-offs should rise in the coming quarters due to restrictive monetary policy, tightening liquidity, diminishing consumer savings and elevated geopolitical risk. Ultimately, consensus expectations of 12% forward EPS growth, which in our view is divorced from these risks, should be revised lower. Absent pre-emptive rate cuts by global central banks, we see risks compounding with peak effect of restrictive monetary policy still ahead.