The sell-off in stocks since March was just the start and the correction has further to go as risks mount, JPMorgan says

• The recent stock slump was just the start of a correction, according to JPMorgan. 
• Investors are too complacent with some risks, and inflation and geopolitics could hurt the market. 
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Stocks staged a rebound on Monday after six consecutive days of declines, but JPMorgan says the correction that's taken place since record highs in late March was just the start. 

The bank's Marko Kolanovic writes that there's a "problematic backdrop" that may further elevate risks in the equity market, along with other macro headwinds including mounting Treasury yields, a robust US dollar, and heightened oil prices.

Major US stock indexes have been riding the tech wave fueled by AI since 2024 kicked off, but Kolanovic sees such high market concentration as typical "red flags" that raise the risk of a reversal. 

"We remain concerned about continued complacency in equity valuations, inflation staying too hot, further Fed repricing, rates moving higher for the 'wrong reasons', and a profit outlook where the implied acceleration this year might end up too optimistic," Kolanovic wrote on Monday. 

He pointed out that investors scrambled to dial down risk amid rising inflation fears and worsening geopolitical risks, which added to the slump in recent weeks. 

The hotter-than-expected CPI print of 3.5% year-over-year in March signals that recent inflation surprises in the US aren't just noise. Coupled with a robust labor market and a three-month US payroll pace of 276,000, it's a clear indicator of economic trends to watch, according to Kolanovic.

On the geopolitical front, even though Iran's strikes on Israel didn't lead to a more severe escalation of conflict, analysts note, "previous red lines have been crossed, which by itself represents an escalation."

"These two problems, i.e. inflation stubbornness and geopolitical tensions, are unlikely to go away anytime soon and thus in our mind they are set to put additional pressure on investors to de-risk," the note said.

Since January, the two-year Treasury yield has surged from 4.2% to 4.9%, matching levels seen last August. Kolanovic warns that if two-year yields stabilize around 5%, prepare for a replay of last summer's turmoil, when the market sold off from August through October.