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Investing.com -- The telltale signs of recession are few and far between, but MRB Partners warned that economic strength and upside inflation surprises could be the cocktail of doom that triggers the next selloff at time when frothy valuations in Treasurys and tech leave little margin for disappointment.
"Policymakers are determined to increase their reflationary policies yet again to encourage stronger economic growth and further asset price gains," MRB said, but cautioned, "frothy conditions in many financial assets leave them vulnerable to even minor disappointments."
For now, MRB expects US and global growth to strengthen, with household spending and balance sheets starting from a healthy base. The expansion remains buoyed by easy monetary and fiscal policy since the Global Financial Crisis, now running 16 years without a true recession in the US.
Yet the next big move for markets might be defensive. MRB sees clear air pockets forming in US Treasurys and technology stocks, both overvalued and at risk of sharper losses if bond yields lurch higher or the tech sector hype gives way to reality. The stampede into AI and megacaps has pushed concentration risk to extremes, with the biggest ten stocks representing over 40% of S&P 500 capitalization, representing a setup MRB says is “priced for perfection in a less-than-perfect world.”
Still, the house view remains pro-growth for now, albeit with an extended rally and warnings that selectivity, tight stops and portfolio insurance are warranted. The firm recommends favoring value sectors including financials, industrials, health care, aerospace, and defence, diversifying away from overexposed growth names, and keeping a short bias on government bonds as MRB expects yields to move higher.
If inflation does surprise, MRB’s research suggests investors should brace for a reversal in bond and stock fortunes, as every new high in yields this decade has produced a meaningful shakeout in equities.