Investors should avoid stocks even amid this year's bullishness because a recession is still on the way, JPMorgan's Marko Kolanovic says

• Investors should be wary of stocks as a recession is still likely, JPMorgan's Marko Kolanovic said. 
• In a Wednesday note, he remained underweight equities and overweight cash.
• "The past year's monetary tightening have yet to be felt and ultimately a recession will likely be necessary to return inflation to target."

While investors are seized by a new bull market in stocks, top JPMorgan strategist Marko Kolanovic is still cautious.

In a note on Wednesday, he remained underweight equities and overweight cash, even as risk assets have performed well since lawmakers reached a deal earlier this month to suspend the US debt ceiling, averting a catastrophic default.

"While the economy's recent resilience may delay the onset of a recession, we believe that most of the lagged effects of the past year's monetary tightening have yet to be felt and ultimately a recession will likely be necessary to return inflation to target," Kolanovic wrote.

"As such, we maintain a defensive asset allocation and believe the risk-reward for equities remains poor given the disconnect between equities and bonds, high likelihood of a recession over the coming quarters, high rates, tightening liquidity, rich valuations, and the still-narrow market breadth."

His warning about market breadth comes as just a handful of mega-cap tech stocks, like Microsoft and Nvidia, have driven market indexes higher this year.

Others on Wall Street have pointed to recent gains among small-cap equities as a sign that the narrowness has eased, demonstrating that investors were once again willing to bet on riskier stocks.

But Kolanovic largely stuck to his stance from May, when he counseled investors to replace equity investments with gold and cash, given the then-unresolved debt ceiling crisis.

On Wednesday, he said more central bank hawkishness is possible, pointing to recent tightening by the Reserve Bank of Australia and the Bank of Canada.

"A long duration stance is starting to look more attractive, as US rates markets have priced out most of the previously-expected cuts; however, we maintain our light duration positioning given the risk that central banks are compelled to restart their rate hiking cycles on inflation persistence, e.g. illustrated by surprise hikes by the RBA and BoC last week," he wrote.