While U.S. stocks are hitting all-time highs, JPMorgan says now is not the time to bail on the market. The reason: investors who have missed the rally are ready to buy at signs of trouble.
“When talking to clients, we don’t find many truly convinced bears at this point, but rather investors who would like to add at ~5-10% lower levels and capture a return to new all-time highs,” strategists led by Marko Kolanovic wrote in a note. “This means that (all else equal) any potential pullback is likely to be shallow.”
Another group, computer-driven funds, which have bought $250 billion of stocks during the post-Christmas rally, could add a similar amount before maxing out, they estimated. Meanwhile, money managers who pick stocks based on fundamentals have yet to raise equity holdings in any meaningful way and retail investors were net sellers, the firm’s data showed.
All of it points to potential buying power in a market where monetary policy and corporate earnings have turned in favor of bulls. The Federal Reserve has become more dovish after the equity sell-off in late 2018. Half-way into reporting season, companies have beat estimates by an average 5 percent, a trend that if continued would keep earnings from falling in the period.
The constructive view is at odds with Morgan Stanley’s Mike Wilson, who said earlier that the market is vulnerable given elevated valuations and subdued growth potential. While the S&P 500 is not far away from JPMorgan’s year-end target of 3,000, Kolanovic still sees ways to make money, such as rotating out of dividend stocks and betting on laggards such as energy and small-caps, companies poised to benefit from an economic upswing.
His bullish stance isn’t without caveats. One is a stronger dollar, which among many things would reduce America’s competitiveness. Another is the trade talks between the U.S. and China, an event whose urgency to get resolved has eased this year with economic data improving and stocks bouncing back.
“If there is such an idiosyncratic event (e.g. Trump abruptly walking away from the deal, or escalation with Iran causing Hormuz disruptions, etc.), systematic investors would also commence selling equities,” Kolanovic wrote. “Our base case is still that the trade deal gets signed, which would put downward pressure on USD and drive further equity inflows and cyclical rotation.”
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