JPMorgan's top strategist Kolanovic has a dire warning for one part of the stock market

Published Thu, Aug 12 202111:30 AM EDTUpdated Thu, Aug 12 202112:14 PM EDT

One of Wall Street's top strategists, Marko Kolanovic, is sounding alarm bells on areas of the market where asset prices are still significantly inflated, calling for a further sell-off. "We still believe that there would be another leg lower in sectors that exhibited bubble-like behavior since the onset of the COVID-19 pandemic," Kolanovic, JPMorgan's chief global markets strategist, said in a note Thursday. "Those include stocks related to COVID-19 lockdowns, renewable energy and EVs, crypto, hyper-growth and innovation stocks. While these segments experienced a significant correction early in the year, we believe that there will be another leg lower," Kolanovic said. Stocks tied to the stay-at-home trend like Zoom Video and Peloton pulled back from last year's massive rallies as the boost from the pandemic started to fade amid the reopening. Meanwhile, industries like clean energy and electric vehicles had an eye-popping 2020 on the back of growing investor interest. The Invesco Solar ETF rallied more than 230% last year and has fallen 17% year to date. Kolanovic believes more weakness for these sectors is on the horizon as the sky-high prices continue to come back to earth. The strategist was one of the few on Wall Street who correctly called the March bottom and the subsequent rebound. He has a Ph.D. in theoretical physics, and is known on Wall Street for applying alternative and quantitative data to predict the stock market's ups and downs. "The final level of correction is likely determined by convergence of valuations between these and equivalent traditional sectors," he said. On the bullish side, the strategist is betting on a rebound in shares sensitive to an economic recovery as he believes bond yields bottomed last week. The 10-year Treasury yield hit a low of 1.15% last week as rising concerns about the coronavirus delta variant made investors flock to safe haven bonds. The benchmark rate has since rebounded to about 1.36% as of Thursday. Prices and yields move inversely. "We believe that bond yields and cyclicals bottomed last week and are now on an upward trajectory for the rest of the year," Kolanovic said. "While we believe that bond yields will increase significantly, the risk of a broad market sell-off driven by tech-bond correlation is not high and can be mitigated. This is another a reason why we prefer cyclicals, international stocks, and value."

Traders on the floor of the New York Stock Exchange, August 11, 2021.

Source: NYSE

One of Wall Street's top strategists, Marko Kolanovic, is sounding alarm bells on areas of the market where asset prices are still significantly inflated, calling for a further sell-off.