JPMorgan Recommends Being Underweight U.S. Equities & Overweight E.U. Equities

Mislav Matejka, JPMorgan's London-based equity strategists is recommending clients allocate their portfolios Overweight eurozone equities at the expense of U.S. equities.

"Eurozone has posted an exceptionally poor performance year to date, lagging the U.S. by 22 percent in U.S. dollar terms," Matejka wrote in a note to clients on Monday. "It is now trading at a lower price relative than the one recorded at the point of peak stress in 2012, when Eurozone breakup was almost the base case."

Matejka adds that eurozone equities have seen a substantial improvement in terms of forward price to earnings. The analyst adds that longer-term metrics including Shiller P/E and P/B remain "supportive" of eurozone equities.

Matejka also notes that eurozone equities earnings relative to U.S. equities "has never been as depressed." The return on equity differential between the two is at the peak of its historical range and should start to "normalize from here," according to the analyst.

Finally, Matejka points out that the Eurozone M3 has been increasing since April, which tends to lead to economic activity. Seventy-five percent of all financing in Europe is conducted through banks, so the fact that the stress tests have passed will allow the banks to "be more supportive" of the overall economy.

"We see this is a relative call, where we believe Eurozone is due for a period of outperformance versus the U.S., but continue to expect U.S. stocks to make new highs in absolute terms."

Matejka also recommends investors remain Underweight in United Kingdom equities and Overweight Japanese equities.