Investors are complacent while geopolitics and stalling disinflation will drive a risk-off shift, JPMorgan's top strategist says

• Investors have become complacent, and stocks are overbought, JPMorgan's Marko Kolanovic wrote.

• Disinflation will be challenged in the first half of 2024, while geopolitical tensions fuel risk-off sentiment.

• Lower bond yields also point to a slowing economy, which may indicate a less profitable year.

Stock markets may be facing vulnerability in 2024, and investors should expect a worse risk-reward environment than anticipated, JPMorgan chief global strategist Marko Kolanovic wrote on Monday.

In this year's first half, the emerging disinflation narrative is likely to become challenged, while geopolitical tensions will deepen risk-off sentiment.

"Equities and bonds rallied into year-end, leaving markets appearing overbought and sentiment in complacent territory, e.g., illustrated by high RSIs, elevated Bull-Bear, VIX near lows, tight credit spreads and rich valuations," Kolanovic wrote. "As a result, we've seen a partial reversal of the year-end rally since the start of the year, amid somewhat stronger data flow and a resurgence of geopolitical risks."

Although falling inflation has been a positive for markets, its slide may begin to stall as goods prices see renewed upside pressure, the note said.

That's as Red Sea attacks on commercial cargo vessels are boosting shipping costs. Meanwhile, low water levels in the Panama Canal have caused major traffic delays.

In the US, that means core consumer inflation will remain steady at 3%, still above the Federal Reserve's 2% target.

Stock investors may also have to reassess their appetite for risk as low yields in the bond market could actually be a signal for low growth ahead, according to JPMorgan.

That will be made evident by weaker corporate earnings as activity slows down, pricing power softens, and profit margins shrink.

"Bottom line, the risky assets have started to fully embrace the macro combination of central banks easing on lower inflation, but at the same time resilient growth and continued record profitability – this might end up contradictory," Kolanovic said.

"All of these points suggest a much less attractive risk-reward than what lower bond yields/central banks easing, and up to now resilient growth, would suggest at face value."

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