Stocks to Rebound After Overpricing Recession Risk

  • The stock market is about to recover after posting six straight weeks of losses, according to JPMorgan’s Marko Kolanovic.
  • He believes too much recession risk has been priced into the stock market as corporate profits continue to grow.
  • “Stocks will rally if there is no recession, given the already substantial multiple downgrade,” Kolanovic said.

After six consecutive weeks of losses, the US stock market is poised for a recovery as corporate profits continue to grow, JPMorgan quant guru Marko Kolanovic said in a note on Monday.

He believes the stock market is overpricing


recession

risk, and that stocks may rally largely if it doesn’t materialize. That seems like a real possibility given that first-quarter earnings continue to grow and look healthy, according to the note.

“Stocks will rally if a recession does not occur, given the already substantial multiple downgrade, reduced positioning and bearish sentiment,” Kolanovic said.

The S&P 500’s forward price-earnings multiple has fallen to 16.6x, which is below its 5- and 10-year average, according to data from FactSet.

“We’re also skeptical of the idea that April’s outflow of stock funds, the highest since March 2020, is just the beginning of a longer phase of outflows,” Kolanovic said.

Investor sentiment, meanwhile, has plummeted to “extreme fear” levels, according to CNN’s Fear and Greed index, while the AAII weekly investment survey recently showed the highest reading of bearish responses since the depth of the Great Financial Crisis in March 2009.

“Equity markets price in too much recession risk,” Kolanovic said, noting that the US stock market is currently pricing in a 70% chance of a near-term recession.

what about if He


Federal Reserve

has reached its hawkish high as interest rates rise and financial conditions tighten, which could also support a move higher in risk assets.

To position himself for the potential rally in equities, Kolanvoic advises investors to own emerging market equities and remain overweight China. Additionally, he expects a continued rise in oil and energy stocks and would use any dip as an opportunity to buy the dip.

Kolanovic’s rather bullish view on equities runs counter to recent notes from Goldman Sachs and Morgan Stanley. Both firms see an increased likelihood of an economic downturn that could see the S&P 500 fall as low as 3,400, representing a potential 15% drop from current levels.

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