After six straight weeks of losses, the U.S. stock market is poised to rebound as corporate earnings continue to grow, JPMorgan’s quantitative guru Marko Kolanovic said in a Monday note.
He thinks the stock market is pricing in too much recession risk and stocks should rally significantly if that doesn’t materialize. That seems like a real possibility given that first-quarter earnings continue to grow and look healthy, according to the note.
“Equities should rally if a recession does not occur, given the already large multiple downgrades, reduced positioning and pessimistic sentiment,” Kolanovic said.
The SP 500’s forward price-to-earnings multiple fell to 16.6x, which is below its 5- and 10-year average, according to FactSet data.
“We are also skeptical that April’s equity fund outflow, the highest since March 2020, is just the start of a more protracted phase of outflows,” Kolanovic said.
“Stock markets are pricing in too much recession risk,” Kolanovic said, pointing out that the US stock market is currently pricing in a 70% chance of a near-term recession.
And if the Federal Reserve has peaked as interest rates rise and financial conditions tighten, that could also support a rise in risky assets.
To position themselves for the potential rally in equities, Kolanvoic recommends investors hold emerging market stocks and remain overweight China. Additionally, he expects a continued rise in oil and energy stocks and would use any decline as an opportunity to buy the dip.
Kolanovic’s rather bullish view on stocks runs counter to recent ratings from Goldman Sachs and Morgan Stanley. Both companies see a greater chance of an economic recession that could send the S&P 500 down to 3,400, which represents a potential drop of 15% from current levels.