Mega-cap stocks powered the 2023 market rally, but they now face a bigger selloff risk as recession looms, a JPMorgan strategist says

• Mega-cap stocks powered the 2023 equity market rally so far, but that trend may not last for long, a JPMorgan strategist said.
• Such shares now face a bigger selloff risk as a recession draws nearer, Jason Hunter told CNBC on Thursday.

Mega-cap stocks have powered the equity rally of 2023, but that may not be the case for long. These market leaders now face a bigger selloff risk than other names as a recession looms, according to JPMorgan strategist Jason Hunter.

"The equity market has held up and it's been more of a flight to quality and flight to cash up until this point and that hung on a bit longer than we thought it would, but we still think that's to come that you'll see the eventual, more full pricing for recession probability," the strategist told CNBC Thursday.

He explained that bullish market momentum had got concentrated in one area, so that just a handful of big-name stocks were leading the market higher. That's consistent with market behavior that typically correlates with an economic environment where growth is weakening, he added.

"This is typical late-cycle behavior where, as growth starts to decelerate but not move into negative territory, the money moves into the more quality names and you get more and more concentration as you go," Hunter said.

As US economic data starts to deteriorate toward contraction, however, investors will grow increasingly bearish on stocks and starts moving into cash, the strategist explained.

"At some point, and as the growth data starts to decelerate more toward negative growth territory, that's when you tend to see flight to quality turn into flight to cash," he said.

"And you see that rotation where we actually think these mega-cap names may temporarily – they may be more at risk than the cyclical companies because of the crowding that's developed here," Hunter added.