The stock market’s 15% rally off its mid-June low will continue higher into year-end, according to JPMorgan.
As earnings revisions reset lower, “risk-reward for equities is not all bad as we move into year-end,” JPMorgan said.
The bank said reasonable valuations, depressed investor sentiment, peak Fed hawkishness are all good reasons to stay bullish.
“We argued that we have entered the phase where the weak dataflow can be seen as good, leading to a policy pivot, and the activity slowdown might prove to be less deep than feared,” JPMorgan’s head of global equity strategy Mislav Matejka said.
There are the 10 reasons JPMorgan expects the current stock rally to not be a typical bear market rally and instead extend higher into the end of the year.
1. “Valuations look attractive, both in absolute terms and relative to fixed income. International markets in particular trade at 12.6x forward earnings, a 20% discount to historical, so even handicapping earnings the valuation support is there,” Matejka said.
2. “Positioning is reduced. Cash levels among clients are generally elevated, hedge fund beta and S&P 500 futures positioning is near low end of range,” Matejka said.
3. “Investor sentiment is overly bearish, with AAII near the lows of last 30 years range,” Matejka said.
4. “Our call that Fed has likely peaked in hawkishness should gain traction, as they move above the neutral range,” Matejka said.
5. “US dollar could be peaking, and the strength of DXY in 1H was a big detriment for risk taking,” Matejka said.
6. “Many activity indicators are in contraction territory, but the downturn might not need to feed on itself. Banks balance sheets are in a strong position,” Matejka said.
7. “Very importantly for the consumer wealth effect, while housing activity has weakened sharply, and house prices have levelled off, after strong gains, they are likely to stay resilient,” Matejka said.
8. “Earnings revisions are negative, and are likely to see a reset, but they will in our view experience only a modest pullback,” Matejka said.
9. “Consumer is likely to be cushioned by excess savings accumulated during the COVID period, as savings rates dip materially below long term averages,” Matejka said.
10. “The global downcycle is unlikely to be synchronized, as China activity is turning for the better,” Matejka said.
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