Headed into this month, investors were running higher stock exposure than they were last summer, the last time a sharp selloff in bonds pulled the rug from beneath a buoyant equity market.

That’s according to JPMorgan’s Nikolaos Panigirtzoglou who, in his latest, warned that “as two-year Treasury yields consolidate around 5%,” stocks could get spooked once it dawns on market participants that the risks from “higher for long” rates go beyond multiple compression.

As Morgan Stanley’s Mike Wilson was keen to point out Monday, equity valuations are awake again to their own rates sensitivity. That awareness lopped ~5% of the S&P in a hurry, mostly through multiple compression.

But second-order thinking requires investors to ask, “What’s next?” If the strength of the US economy and the persistence of inflation leaves the Fed parked at terminal in what’ll feel like perpetuity, what are the implications of that longer stay? One possible implication is a hard landing.

“Most of [the] increase in two-year Treasury yields between January and the beginning of April was ignored by equity investors in a similar fashion to May-July 2023,” Panigirtzoglou wrote. “The risk is that the ‘high for long’ narrative of last August-October, which at the time triggered fears of an eventual hard landing, hit[ting] risk assets, is repeated going forward.”

The figure above shows two-year yields with Fed cut pricing for 2024. The two move in lockstep (obviously) and as Panigirtzoglou noted, stocks were more than happy to sprint higher as rate cut odds increased late last year.

Beginning in late January, delirious equities simply stopped caring about the front-end, which began to reflect less easing commensurate with an outperforming US economy.

Equities “no cares” attitude manifested in a series of new record highs, forcing bears to capitulate. Now here we are with rates threatening to spoil the party amid dialed-up equity exposure.

Just how “dialed-up” is it? Exposure, I mean. Well, it depends on who you ask, but the figures below from JPMorgan give you a sense of things.

“Our implied equity allocation by non-bank investors stood at the beginning of April at its highest level since 2007, significantly higher than the local peak seen at the beginning of last August,” Panigirtzoglou wrote, referencing the figure on the left. The figure on the right shows the bank’s futures positioning proxy.

He didn’t stop there. Panigirtzoglou also highlighted spec positioning (i.e., CFTC data) and noted that short interest on SPY and QQQ are quite low (figure on the left, below).

Momentum signals, he went on, suggest CTAs might’ve already started trimming longs. A JPMorgan proxy for risk parity leverage was perched near its highest levels since late 2021 earlier this month.

The figure on the right, above, is a proxy for Long/Short exposure. It “not only point[s] to elevated equity exposures, but also to high exposure to tech stocks” among hedge funds, Panigirtzoglou remarked.

It’s not just the pros. JPMorgan’s retail investor proxies “all suggest” retail investors were generally bullish headed into April, increasing the risk “of a retrenchment” in the event the rates-policy outlook turns more onerous.

As detailed here over the weekend, equity-focused ETFs and mutual funds saw nearly $29 billion in redemptions on net over the past two weeks, a stretch during which global equities fell 4.4%. US equity funds lost $21 billion over the same period, indicative of the angst which pushed the S&P off record highs reached late last month.

Panigirtzoglou summed it up. “The current market narrative and patterns are increasingly resembling those of last summer as inflation surprises and Fed rate cuts are priced out,” he wrote, noting that investors “are starting to look at reducing overweights or adding hedges in risk markets.”