JPMorgan Chase & Co.’s Marko Kolanovic is quickly emerging as one of
the very few bulls among Wall Street’s top strategists, who says US
stocks will rally in the second half.
Kolanovic, voted the No. 1 equity-linked strategist in last year’s
Institutional Investor survey, has stuck to his calls for risky assets
this year despite the sharp rout in the first half. He expects a
rebound in stocks on attractive valuations and as the peak in investor
bearishness has likely passed.
“Although the activity outlook remains challenging, we believe that
the risk-reward for equities is looking more attractive as we move
through the second half,” Kolanovic wrote in a note dated Aug. 1. “The
phase of bad data being interpreted as good is gaining traction, while
the call of peak Federal Reserve hawkishness, peak yields, and peak
inflation are playing out.”
His view that much of the bad news from weak economic data is now
priced in and that stocks will end the year “meaningfully higher” is
in sharp contrast to calls by counterparts at banks including Goldman
Sachs Group Inc., Morgan Stanley, and Bank of America Corp.
Goldman’s Cecilia Mariotti wrote in a note on Monday that it was still
too soon for markets to dismiss the risk of a recession on bets of a
pivot in the Fed’s hawkish stance on policy. And even after this
year’s selloff in equities, recession risks aren’t fully priced in
European equities, according to Goldman.
“Looking at the re-pricing of cyclical assets in the US and EU, we
think the market might have been too complacent too soon in fading
recession risks on expectations of a more accommodative monetary
policy stance,” Mariotti said.
US stocks have rallied sharply in the past month, leading to the S&P
500’s best monthly gain since November 2020, as bleaker data raised
bets that the Fed will slow the pace of interest rate hikes, with
signs of a better-than-feared second-quarter earnings season also
lifting risk demand. But the rebound now faces a crucial test as
August and September have historically been the worst months for the
US benchmark index.
Short positioning data indicates that Kolanovic could be right in
forecasting a sustained recovery, at least in the short term.
Citigroup Inc. strategists including Chris Montagu said short
positions across most markets are facing steep losses after last
week’s rally, increasing the risk of a short squeeze and equity upside
from forced unwinds of large legacy shorts.
But with economic data still remaining far too uncertain, markets may
remain volatile in the coming months, according to Mark Haefele, chief
investment officer at UBS Global Wealth Management. “We advise
investors against reading too much into July’s somewhat more positive
picture,” he said on Tuesday.
Morgan Stanley and Bank of America, meanwhile expect sharp downgrades
in corporate earnings estimates to add pressure on stocks in the next
few months. Morgan Stanley’s Wilson — one of Wall Street’s biggest
bears — said on Monday that although earnings estimates have started
to decline, the bulk of the corporate downgrades will come through
only in the fourth quarter.
Bank of America strategist Michael Hartnett also said last week it was
too soon to position for a bull market trade and that the “true lows”
for the S&P 500 were below 3,600 points — about 13 percent below its
latest close.
But JPMorgan’s Kolanovic says that S&P 500 valuations look better than
fairly valued given the presence of higher quality companies in the
index, adding that the rate at which equity multiples have contracted
exceeds the typical compression seen during prior recessions.
Kolanovic also argues that investor expectations are likely to be
reset with regard to the Fed’s policy as well as company earnings.
“Risk markets are rallying despite some disappointing data releases,
indicating bad news was already anticipated/priced in,” he said.
While calls of a looming US recession are also growing after data
showed gross domestic product shrank by more than expected in the
second quarter, the JPMorgan strategists said they still expect the
country to avoid an economic contraction.