Equities can continue rising even as the hawkish Federal Reserve and Treasury yield curve inversion spook investors, according to JPMorgan Chase & Co.’s strategist Marko Kolanovic.
If anything, there is “too much negativity rather than too much complacency in markets,” Kolanovic and his team wrote in a note to clients, sticking with a pro-risk stance. They cite three reasons for their optimistic outlook:
Stock markets on both sides of the Atlantic have quickly recovered from the selloff triggered by Russia’s invasion of Ukraine, paring this year’s losses. Even as a spike in commodity prices and an inversion in parts of the U.S. treasury yield curve have raised concerns that an economic slowdown is imminent, the rout has mostly affected bond markets, with equities so far shrugging off recession risks.
The resilience has taken some equity strategists by surprise, while Morgan Stanley’s Michael Wilson and Bank of America Corp.’s Michael Hartnett have urged investors to seek opportunities to sell the rally. JPMorgan’s team disagrees, saying that economic indicators are so far beating expectations and that it’s too early to position for a recession.“These positive economic surprises are likely to translate into earnings surprises in the coming reporting season,” they said in their note. In fact, with forecasts projecting a “large sequential decline” in S&P 500 profits, “the hurdle for the coming earnings reporting season, which kicks off in the U.S. in about two weeks, seems rather low.”