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Pro Analysis

JPMorgan: Bubble in safe stocks ready to pop

Tech bubble
Ross Gilmore | Redferns | Getty Images

So-called safe stocks with low price volatility and big dividend yields are way overvalued and due for a big decline, JPMorgan told clients Monday.

"This style is now up 74 percent relative to the market since the beginning of this cycle in '09, pushing its valuation to reach a new record high," said the firm's U.S. equity strategist Dubravko Lakos-Bujas in a note to clients. "Additionally, low volatility has become even more correlated to momentum, a vulnerable trade that has become increasingly crowded. This suggests low volatility may be in a bubble and subject to negative tail risk."

Investors have crowded into these once slow and steady stocks after the U.K.'s Brexit vote, craving a safe, income-generating substitute for bonds as yields plummet to record lows, and even negative. The PowerShares S&P 500 Low Volatility Portfolio ETF is up 11 percent this year, more than double the return of the S&P 500, which hit a new intraday high Monday.

Here's what will pop this safety bubble and the stocks that clients should hide out in, according to JPMorgan.