JPMorgan trading desk says buy the dip in stocks

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The longest slide in US stocks since August has created an opportunity for dip buyers, according to JPMorgan Chase & Co.’s trading desk.

Worries over everything from the durability of the artificial intelligence trade to the Federal Reserve’s monetary policy path have contributed to a four-day selloff that shaved 3.4% from the S&P 500 Index through Tuesday’s close. To Andrew Tyler, head of global market intelligence at JPMorgan, that decline represents a “technical washout” in equities that may have already ended.

“Given that there have not been any changes to the fundamental story, nor does our investment hypothesis rely on the Fed easing, we are dip-buyers,” Tyler wrote in a note to clients on Wednesday.

With stocks higher on Wednesday morning, traders are awaiting earnings from AI-bellwether Nvidia Corp. after the close and the September non-farm payrolls report later in the week. The two events “could set the stage for the next run to or through all time highs,” Tyler wrote.

Though the S&P 500 is still expensive by historical standards, the selloff has taken its 12-month forward price-to-earnings ratio to 21.9, the lowest level since August, according to Bloomberg data. At the same time, a Deutsche Bank measure showed equity positioning slipping back to neutral last week with discretionary investors turning underweight, suggesting they may have dry powder to buy stocks in the near-term.

To be sure, stretched positioning and elevated valuations in equities have drawn warnings from some market participants in recent days: Goldman Sachs Group Inc. President John Waldron said on Wednesday that markets could see further losses. Algebris Investments’ founder and chief executive officer, meanwhile, warned investors to reduce allocation to the world’s top technology companies as he made a bearish case for AI.

The S&P 500 is down 3% this month, on pace for its worst November since 2008, amid worries over whether artificial intelligence is generating enough revenue or profit to justify the massive spending on infrastructure.

Tyler, on the other hand, noted several encouraging signs, such as improving market breadth, with roughly 50% of S&P 500 stocks closing higher on Tuesday.

Regarding Nvidia’s earnings and AI, Tyler wrote that the bank doesn’t “see investors blindly chasing low/unprofitable companies tied to the AI theme” even if earnings are strong.

“If the net result of NVDA’s earnings is the market expressing a more concentrated view on AI, then that is a positive, pushing the index higher while also assuaging bubble concerns,” he said.