Investors taking lumps in the stock market can take comfort in the forecasts of Marko Kolanovic, JPMorgan Chase’s quant guru, who says the S&P 500 can get back to a record in the first half of next year.
Helping spur the rebound will be Federal Reserve rate cuts and support of assets like Treasuries and commercial-mortgage-backed securities, Kolanovic said in a note to clients. Put together, it should be enough -- provided the economy starts opening up sometime in 2020.
“The combined suppression of the risk free rate and credit spreads by the Fed likely has a bigger positive impact on equity valuation, compared with the negative impact of the temporary earnings loss,” Kolanovic wrote in note that explored what stimulus would mean for companies over six, 12 and 18 months. “Given the massive suppression of the discounting rate, the present value of future earnings in all three earnings impact scenarios is above the pre-crisis level. This indicates that the S&P 500 should attain previous all-time highs if the monetary measures are sustained.”
The combined impact of lowering interest rates and narrowing credit spreads has reduced the rate at which future profits should be discounted to about 125 basis points, Kolanovic estimates. That implies higher valuations for stocks in the future.
“For countries that don’t have an ability to effectively reduce interest rates or credit spreads,” the coronavirus would result in a 30% decline in the present value of earnings, Kolanovic said.
After the Fed rolled out the first wave of monetary easing in early March, JPMorgan’s head of head of macro quantitative and derivatives research assessed positioning data, fund flows and liquidity to conclude that the S&P will reach its previous record in the second half of next year. After the second wave of easing, which included unlimited purchases of Treasuries and mortgage-backed securities, Kolanovic has moved up his forecast.
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