J.P. Morgan’s Kelly: ‘Year of Momentum’ to Give Way to ‘Year of Valuation’

Asked what those bets were, Kelly said they include Bitcoin — “basically a cult masquerading as a currency” — and special-purpose acquisition companies (SPACs).

Some mega-cap stocks are also heavily overpriced, Kelly says. He wouldn’t name names, but Microsoft and Tesla are currently trading at year-to-date gains topping 40%, roughly double the gains in the S&P 500, which, along with the Dow Jones Industrial Average, hit another record high in intraday trading on Monday. Microsoft has gained more than 50% year to date.

Kelly expects cyclical stocks will outperform defensive stocks in 2022, which will support a strong outlook for European and Japanese stocks over U.S. shares since the two international markets are more heavily weighted toward cyclical stocks. Another support for international over U.S. stocks, according to Kelly: They are not as expensive as the U.S. markets and many have twice the dividend yield.

Asked about the recent push by some market strategists to favor alternative investments, Kelly noted the dispersion of valuations within the alternative universe and warned investors to “be very careful” about what they buy. He favors alternatives tied to the real economy, such as real estate and infrastructure sectors, which should fare well in a rising inflation environment and which are far less hyped than Bitcoin and other digital assets.

Finally, he noted what many strategists know all too well but investors often seem to forget, especially after double-digit returns in 2019, 2020 and year-to-date:  “Stocks are not guaranteed to go up every year.”