- Investors should ignore the flood of bearish
stock market calls and prepare for a risk-on rally, JPMorgan says. - The bank said it doesn't expect rising geopolitical tensions between Russia and Ukraine to last, and said inflation could be about to peak.
- "We believe on should look through the widespread 'slowdown' calls that are currently in vogue, and stay bullish," JPMorgan said.
With the S&P 500 down 10% from its record high amid a tightening Federal Reserve and rising geopolitical tensions, there has been an influx of bearish stock market projections.
But JPMorgan is telling investors to ignore the dire outlooks and instead prepare for a risk-on rally in stocks sometime this Spring, according to a Monday note.
"We believe one should look through the widespread 'slowdown' calls that are currently in vogue, and stay bullish on banks, mining, energy, insurance, autos, travel and telecoms," JPMorgan's Mislav Matejka said.
It's a gutsy call given that Russia escalated tensions with Ukraine on Monday as it invades some eastern regions of the country, and as the Federal Reserve gears up for its first interest rate hike since late 2018 at its meeting next month.
But inflation could be peaking and heightened tensions between Russia and Ukraine will not last as long as some may think, according to the note.
"While geopolitics could flare up into month end, we do not expect this to last, and call for risk-on internals to resume into spring," Matejka said. Those internals include continued outperformance in cyclical sectors like energy and financials, which Matejka favors over growth stocks for now.
In fact, despite expectations for a risk-on rally later this Spring, Matejka doesn't view growth stocks as the obvious candidate to participate in the expected rally. That's because bond yields can continue to rise, their valuations are still not cheap even after current decline, and earnings growth in the tech sector "might not be exceptional anymore."
"The earnings of certain value sectors are bouncing, and there could be increasing concerns over the continued strong delivery, and the visibility with respect to, the earnings of growth areas in the equity market, not least given the difficult base effects," Matejka explained.
To position for the potential risk-on rally in stocks, Matejka recommends investors maintain an overweight to Europe stocks over the US, and stick to the more cyclical sectors that are poised to benefit from an ongoing economic recovery post-pandemic, including in the energy and travel sectors.