The bull market in stocks is 'far from over' and potential conflict between Russia and Ukraine could spark dovish reassessment by central banks, JPMorgan says

• The bull market in stocks is "far from over" as the Fed will likely not be as hawkish as investors expect, JPMorgan said in a Monday note.
• The bank said any conflict between Russia and Ukraine would likely spark a dovish reassessment by central banks.
• "We believe risky asset markets have mostly adjusted to monetary policy shifts by now," JPMorgan said.

The bull market in stocks is "far from over" despite investors' increasing concerns about a hawkish Federal Reserve and geopolitical tensions between Russia and Ukraine, JPMorgan said in a Monday note.

The bank believes a lot of bad news is already priced in the markets, and any conflict between Russia and Ukraine would likely lead to a dovish reassessment by central banks. On Tuesday, Russia said it pulled back some troops from the Ukraine border.

"We believe risky asset markets have mostly adjusted to monetary policy shifts by now, short-term rates have likely moved too far vs. what central banks will ultimately deliver in hikes this year, and a China policy pivot can offset a good part of the developed markets central bank tightening impact," JPMorgan's Marko Kolanovic said.

The market's expectations for the number of 25-basis-point Fed rate hikes in 2022 soared to more than five last week after January CPI data revealed inflation surging to a 40-year high. Kolanovic expects the inflation theme to likely continue into 2023, and said therefore investors should maintain exposure to energy and financial stocks.

But rising interest rates and higher inflation aren't enough to spark an economic recession later this year, as that doesn't line up with the broader macroeconomy, according to Kolanovic, who notes that as COVID-related restrictions start to ease, pent-up demand from consumers and corporations should materialize.

"We think it is wrong to position for a recession given still extremely favorable financing conditions, very strong labor markets, underleveraged consumers, strong corporate cash flows and banks' strong balance sheets," he argued.

With the S&P 500 off 8% from its record high, Kolanovic expects a rebound in risky areas of the stock market thanks to improvement in beaten-down investor sentiment and inflows from corporate stock buybacks and systematic funds.

"We see this market sell-off as overdone. The stock market is not only in correction, it is already in bear market territory without a recession in sight," Kolanovic said, pointing to the 20% correction in small-cap stocks.

"We still see 2022 being a year of economy recovery, with double-digit earnings growth and undemanding valuations supporting [small and mid cap stocks]," he concluded.