Why a top Wall Street quant sees S&P 500 taking back all its losses by year’s end

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JP Morgan’s Marko Kolanovic, one of the most followed quantitative analysts on Wall Street, predicted in a note to clients on Wednesday that US stocks could see a torrid rise during the second half of 2022.

While the head of Kolanovic (JPM CEO Jamie Dimon) helped scare the markets on Wednesday with his talk of an economic “hurricane”, how many JPM explained the reasons why the latest rebound in stocks could continue, although US stocks ended Wednesday’s session slightly lower. According to him, May could serve as a “template” for actions during the balance of the year.

As a reminder, the bassist comments of Dimon and the chairman of the Federal Reserve Bank of St. Louis, James Bullard, contributed to the sale of the shares (among other factors), driving the S&P 500 SPX,
a 0.8% drop, while the Dow Jones Industrial Average DJIA,
lost 0.5% and the Nasdaq Composite COMP,
it was down 0.7%. This caused the S&P 500 to fall 14% during the year so far.

He also noted that his bullish call is “out of consensus” on Wall Street, although Wall Street strategists have raised their year-end targets for stocks over the past few weeks. According to FactSet data, the current average year-end forecast for the S&P 500 is north of 5,000, which is well above where the equity benchmark is currently quoted.

“Despite the strong sell-off, we believe that the markets will recover the YTD losses and lead to a year with almost no changes,” Kolanovic wrote.

Kolanovic cited some factors that helped drive the equity rebound that helped spur the S&P 500 and the Dow to end in May with tiny gains (while the technologically heavy Nasdaq Composite lagged behind the market wider and ended up about 2% lower).

  • First, there were measured comments from Federal Reserve officials, especially Atlanta Fed chief Raphael Bostic, who raised the possibility of a “pause” in the central bank’s plan to rapidly increase interest rate.

  • Then there was the encouraging comment from megabank CEOs (including, ironically, Dimon, who seemed much more optimistic about the outlook for the U.S. economy just a week ago).

  • And finally, corporate buybacks soared after gains, while rebalancing fixed-income portfolios helped drive stocks higher toward the end of the month.

All of this was underlined by a strong short strait that helped spur the strongest rebound in U.S. equities in more than a year.

Given that the position, according to Kolanovic, is already stretching downwards, there is simply no room for the shares to go down substantially.

“Bones are saying, ‘Only the Fed can make a U-turn here can change the course of the markets here.’ “In fact, when the price reaches the minimum threshold (and we are close to that point), even bad news can’t push the market down substantially.”

And as volatility among assets continues to normalize, the basis for risk-taking back-up to boost stocks is well established, with JPM seeing $ 1.2 trillion in stock purchases from corporations that they recommend their own shares and $ 500 billion more to be poured into the market in name. of “volatility-sensitive” investors.

Of course, current prospects do not guarantee indiscriminate buying. Rather, investors should be demanding. There is currently a large dispersion of performance and valuations, which creates room for investors to outperform benchmark returns.

With “defensive” stocks already trading near record relative valuations in the rest of the market, Kolanovic sees the biggest opportunity in relatively undervalued market segments, including Chinese ADRs (a popular ETF of these stocks has dropped more 20% so far this year). ), small capitalizations (the Russell 2000 RUT,
has fallen by more than 17% so far), energy and biotechnology. All of these segments are trading close to the lowest relative valuations of all time.

Kolanovic illustrated this scatter in a couple of graphs. The first showed the difference between stock price-to-earnings ratios that are “expensive” compared to the market and those that are “cheap”.

JP Morgan

Its second graph illustrates how small-cap stocks are trading at very low valuations compared to the rest of the market.

JP Morgan

Kolanovic concluded by pointing out that there is room for stocks to fall if the US economy goes into recession. But this is not the case with JP Morgan.

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