A runup in U.S. Treasury yields sapped demand for risk assets. Profits for companies in the index had fallen for two straight quarters through June.
While the big companies have always had a higher valuation multiple, the gap between them and the rest of the market has grown too much, Kelly said.
“I would rather underweight mega caps, overweight value and and just allow inflation to come down,” he said. Within sectors, he prefers energy and financials.
JPM’s call on inflation is that it will come down to 2% by the fourth quarter of 2024. If it doesn’t damages the economy significantly, some of those cheapest sectors can do better, said Kelly.
As for small caps, Kelly said he’s “still nervous” because almost half of companies in the Russell 2000 Index “aren’t actually making a profit.”
The index is trading near a level last seen in October 2020, it’s 10% below its longer term 200-day moving average and 75% of the Russell 2000 constituents are already in bear markets.
It’s too early to get to small caps with the threat of recession looming over the economy. “I’d rather get in after we’ve seen a certain amount of economic disruption,” he said.