As financial conditions gradually eased beyond expectations, the market’s anticipation of six rate cuts in the coming year intensifies. However, should the Federal Reserve adhere to a higher for longer policy, a multitude of stocks would face impending risk, according to a JPMorgan Equity Strategy report published on Friday.

The report emphasizes that while accommodating the cycle, an accommodating monetary policy may prompt a resurgence of ‘higher for longer’ at a juncture featuring a substantial rise in equity positioning and reassessed valuation reaching levels akin to an era of near-zero short-term rates, as per the analysts.

Given recent data such as CPI, jobless claims, retail sales, and shipping disruptions, analysts suggest equities could be vulnerable under the influence of a dovish Fed.

Despite the consensus around a “soft landing scenario,” a “higher for longer” outlook could imperil equity valuations, culminating in a likely sharp rotation in stock leadership. This could trigger a reversal in high-beta, illiquid, low quality/weak balance sheet, unprofitable, and small-cap stocks which have prominently outperformed over the past two months, the analysts indicated. Such a reversal would result in a shift away from short-term momentum factors and accentuate the long-term momentum crowding trend, heightening the risk of even more extreme concentration.

The report has identified Russell 1000 (NYSEARCA:IWF) ex-defensive sector stocks with short-term momentum at risk, estimating their performance percentages from Dec. 31, 2022, to Nov. 13, and from Nov. 13 through Jan. 18 to delineate underperformers that underwent a short squeeze:

• Victoria’s Secret & Co. (VSCO) – Performance Dec. 31 – Nov. 13: -48%, Performance Nov. 13 – Jan. 18: 24%
• Harley-Davidson Inc. (HOG) – Performance Dec. 31 – Nov. 13: -35%, Performance Nov. 13 – Jan. 18: 24%
• Bath & Body Works Inc. (BBWI) – Performance Dec. 31 – Nov. 13: -29%, Performance Nov. 13 – Jan. 18: 43%
• Mister Car Wash Inc. (MCW) – Performance Dec. 31 – Nov. 13: -29%, Performance Nov. 13 – Jan. 18: 26%