COMT - J.P. Morgan's Kolanovic goes underweight bonds with a pro-risk outlook

Global growth is still in the cards for the second half of the year, with inflation moderating, according to J.P. Morgan.

"Last week’s strong US jobs print should allay concerns that the economy has already slipped into recession, though cements the case for a 75bp Fed hike later this month," global strategist Marko Kolanovic wrote in a note. "With most investors positioning for a recession and sentiment extremely weak, if an economic disaster doesn't materialize we believe risky assets can substantially recover."

The risk of a recession is being priced in unevenly over asset classes, with much higher risks priced into equities than bonds, Kolanovic said.

"Given the disparate recession risk pricing, we reduce the weight of corporate bonds ( NYSEARCA: LQD ) ( HYG ) and increase the weight of government bonds ( TBT ) ( NASDAQ: TLT ) ( SHY ) in our model portfolio to move credit back to an UW stance," he said. "In this way our model portfolio’s pro-risk stance refocuses on equities and commodities, with a credit UW serving as a partial hedge in an adverse scenario."

He now has a large overweight in commodities ( USCI ) ( COMT ) and commodity-sensitive assets and reiterates a key Overweight in energy stocks ( XLE ).

"As for the upcoming earnings season, we expect it to be positive but decelerating at the margin," he said. "We expect better results for Cyclical Value sectors such as Energy, Industrials ( XLI ), and Financials ( XLF ), while Utilities ( XLU ), Real Estate ( XLRE ), and Consumer Discretionary ( XLY ) may post negative earnings growth."

"We would also highlight the attractive risk/reward for Banks ( KBE ) based on inflation as a tailwind, healthy balance sheets and attractive valuations"

They still expect the S&P 500 ( SP500 ) ( NYSEARCA: SPY ) to end the year at 4,800 with EPS of $225.

See why Credit Suisse is wary on Big Tech earnings .

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