Investors should sell stocks and take profits as the latest rally is set to falter amid surprises from the Fed and weak corporate earnings, JPMorgan says

• Investors should sell stocks and take profits as the current market rally is set to fizzle, according to JPMorgan.
• The bank said stocks will face several curveballs this year thrown by the Fed and weak corporate earnings.
• "We... are reluctant to chase the past week's rally as recession and overtightening risks remain high," JPMorgan said.

A team of analysts led by JPMorgan's Marko Kolanovic say that it's time to sell stocks and take profits, as the latest rally in markets is set to fizzle through this quarter.

In a Wednesday note, the bank said all of the positive catalysts that drove stocks higher are out in the open while there remain several curveballs that could be thrown by the Federal Reserve and US companies as they report weaker earnings than investors are expecting.

"We remain cautious on risk assets and are reluctant to chase the past weeks' rally as recession and overtightening risks remain high, and we believe that a lot of good news is already in the price in terms of inflation moderation or the potential for a soft landing," Kolanovic said.

And even if inflation does continue to moderate, as it has been doing for months, the ongoing tightness in labor markets could pose a double whammy that could hurt corporate profit margins and drive the Fed to be keep tightenin monetary policy, according to the note.

The Fed is expected to pause its interest rate hikes later this year, but not before it hikes rates by 25 basis points in February and another 25 basis points in March. That would bring the Fed Funds Rate to about 5%.

Further curveballs that pose risks to stocks include politics (the debt ceiling limit is again approaching), a choppy path to sustained disinflation, and weaker capital expenditures leading to a rollover in business activity.

"We believe that one should be using potential gains over the next weeks to reduce exposure," JPMorgan said.

Given the risk-reward profile, JPMorgan increased its underweight recommendation for equities and took profits in credit in its model portfolio. The bank remains overweight commodities with a focus on energy. Its bullishness on energy hinges on China's ongoing reopening, the potential for more crude oil production cuts from OPEC+, and the replenishing of the US' strategic petroleum reserve.

While JPMorgan has a bearish view on stocks in the short-term, longer term it still sees the potential for upside. The bank has a 4,200 year-end price target for the S&P 500, representing potential upside of 5% from current levels. But before it reaches those levels, the bank expects the market to retest its lows from 2022, meaning a choppy year ahead for markets.