JPMorgan strategists have once again reiterated their concern about the sustainability of this year's rally in U.S. equities. The is up 16.2% year-to-date.

The strategists point out that the situation is becoming “increasingly unsustainable” due to expanding multiples in the face of a restrictive rate environment.

“Equities are up 16% YTD mostly on multiple expansion while real rates and cost of capital are moving deeper into restrictive territory. History suggests this relationship is becoming increasingly unsustainable, posing risk to the equity multiple, especially since earnings expectations already face a high hurdle for 2024,” they wrote in a client note.

JPM’s model shows the current S&P 500 multiple is approximately 2.7 times overvalued. This assessment indicates that stock prices may have outpaced their underlying fundamentals.

“The Fed Model-based valuation is the most expensive since 2002 and is disconnected from a slowing business cycle,” the strategists added.

“Furthermore, other traditional valuation metrics are elevated — S&P 500 is trading richly on EV/EBITDA of 14.3x (91%ile), EV/ Sales of 2.7x (88%ile), and P/B of 4.3x (89%ile). Forward multiples assume doubledigit earnings growth of 12%, which is a high hurdle for this aging business cycle facing increasingly restrictive rate environment.”

At the sector level, technology shares are crowded and richly valued, while high-quality defensive sectors are no longer considered expensive.