JPMorgan warns investors not to 'overstay welcome,' says market bounce will 'peter out' soon

Published Tue, May 26 20209:26 AM EDTUpdated Tue, May 26 20209:57 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

This story is for CNBC Pro subscribers only. The recent rally for value and cyclical stocks has a short runway, and investors should be ready to jump off soon, according to a new note from JPMorgan. Last week was the best week for the Dow Jones Industrial Average in more than a month, as it gained 3.29%. Some of the strongest sectors were cyclical sectors such as autos, travel and construction, and rising oil prices also spurred a strong week for energy stocks. Stocks were up again big on Tuesday. Still, value stocks — typically defined by high earnings and dividend yields relative to their price but slower growth rates — are historically cheap compared with faster growing stocks, according to JPMorgan. The rebound in some economic numbers and light positioning from investors in those sectors should allow those sectors to continue to move higher in the coming weeks, but it won't be a long-term surge, the bank said in a note. "Investors should not overstay their welcome in the bounce, in our view, where we reiterate that it is likely to peter out as we enter summer," the note said. As Europe and United States lift economic restrictions that were put in place to slow the spread of the pandemic, the drastic declines in economic activity should show a partial reversal in upcoming data releases, JPMorgan predicted. That could help the cyclical stocks continue to move higher. Cyclical stocks are names that typically move first on a sign of economic recovery such as industrials. However, the lingering effects of the pandemic on the world economy will likely prevent a full recovery for the cyclical companies and their stocks, according to the bank's analysts. "Some of the pent up demand will get exhausted soon. In addition, the labour market dislocation will not allow the consumer final demand to fully complete the recovery this year. This might lead to an inventory overhang down the line," the note said. A slowdown in capital expenditures will also likely hurt the cyclical stocks. Declining profits, tight credit conditions and excess capacity will all weigh on capital expenditure even as the world recovers from the pandemic, the note said.

A person walks at the Wall Street subway stop in New York City.

Angela Weiss | AFP | Getty Images

This story is for CNBC Pro subscribers only.

The recent rally for value and cyclical stocks has a short runway, and investors should be ready to jump off soon, according to a new note from JPMorgan.

Last week was the best week for the Dow Jones Industrial Average in more than a month, as it gained 3.29%. Some of the strongest sectors were cyclical sectors such as autos, travel and construction, and rising oil prices also spurred a strong week for energy stocks. Stocks were up again big on Tuesday.