It's time to become defensive with stocks and ditch them for bonds because a recession is coming, says JPMorgan's top strategist

Marko Kolanovic.

Hollis Johnson/Insider

• Investors should ditch stocks for bonds because a recession is guaranteed, according to JPMorgan's top strategist.
• "We maintain that markets are overpricing recent good news on inflation and are complacent of risks," Marko Kolanovic said. 
• The strategist thinks investors should fade the stock rally of 2023 because an economic downturn hasn't been priced into markets.  

Investors should steer clear of US stocks and pile into bonds as a recession is guaranteed if the Federal Reserve wants to bring inflation back down to its target, according to JPMorgan's top strategist.

Marko Kolanovic said Monday he's "turning more defensive" on stocks – and recommends investors should fade the stock market rally of 2023 because "a recession is currently not priced into equity markets."

US stocks have enjoyed a strong start to the year, with the benchmark indexes S&P 500 and the Nasdaq Composite up 8% and 15%, respectively, largely due to rapidly cooling inflation. 

"With equities trading near last summer's highs and at above-average multiples, despite weakening earnings and the recent sharp move higher in interest rates, we maintain that markets are overpricing recent good news on inflation and are complacent of risks," Kolanovic wrote in a note. 

Kolanovic thinks an economic downturn will "eventually be necessary" to cool down inflation the the Fed's 2% target, adding that there's a "fairly limited" chance that the stock market will enjoy any gains. 

US inflation has moderated since mid-2022, coming in at 6.5% in December, thanks to the Fed's aggressive interest-rate hikes. The central bank recently raised the benchmark rate by 25 basis points, taking the cumulative increase since last March to 450 basis points.

With inflation falling, it's prompted investors to speculate the Fed could halt its rate hikes in the foreseeable future or even start cutting them later this year. A report due Tuesday is expected to show a further slowdown in inflation, with Wall Street estimating January price pressures will show an annual pace of 6.2%. 

But that's not swaying Kolanovic who thinks the disinflationary process in the US economy could just be "transitory."

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