Investors cheering the gains in technology stocks this year may not have much more to celebrate, according to JPMorgan Chase & Co.’s Marko Kolanovic.

Tech looks “overbought,” said the bank’s equity strategists led by Kolanovic in a note to clients Monday, adding that the sector is unlikely to benefit from falling bond yields with markets already over-discounting the decline.

“Within tech, we argued that unprofitable parts will not perform, with our more positive stance on quality, good cash flow parts,” Kolanovic wrote. “In conclusion, we do not advocate to be short tech and still think the sector will be trading better than last year, relative to the market, but think that its absolute run is getting stretched.”

Kolanovic was one of Wall Street’s biggest optimists through most of the market selloff in 2022 but has since reversed his view, cutting the bank’s model equity allocation in mid-December, January and March due to a deteriorating economic outlook this year. 

His bullish S&P 500 Index price target of 4,800 for 2022 came in roughly 25% higher than where the equities benchmark ended. The bank’s 2023 year-end S&P target of 4,200 stands just above where the index is currently trading.

U.S. equities have remained resilient this year despite a gloomy profit outlook and rising fears of a recession, with tech shares leading the market’s advance. The tech-heavy Nasdaq 100 is up 20% year-to-date, while the S&P 500 has risen only 8%.

JPMorgan said risk-reward for equities does not look attractive entering the second half of 2023 and “heavily favors” cash, reiterating its allocations: underweight equities and overweight cash. Even in the optimistic soft landing scenario, the upside for equities is likely less than 5%, while a mild recession could see stocks retest previous lows and drop 15% or more, Kolanovic said.

“Given we are underweight stocks, it is indeed a worrisome scenario that stocks have a relief rally based on the resolution of the regional banking stress and looking ahead to the coming pause in the hiking cycle,” Kolanovic said. 

The strategist cited the “underwhelming breadth” of the rally as one reason for being underweight equities, noting that it was driven by just a handful of stocks. Gains were also concentrated across only a few tech names that could be attributed to thematic excitement over crazes like artificial intelligence as well as over optimistic expectations for margin growth rather than broader macroeconomic factors.

Other factors include the Cboe Volatility Index, or VIX, and path for interest rates. The VIX has dipped near 17, its lowest level since January 2022, according to data compiled by Bloomberg. That reflects “complacency,” he said. Meanwhile, there is a “clear and rising risk” that Federal Reserve officials will not deliver market expectations for cuts in the second half of the year, Kolanovic said.

This article was provided by Bloomberg News.