After a disappointing start to 2022, stocks showed resilience in the second half.
Since the end of June, the S&P 500 has gained nearly 10%. And according to JPMorgan, there’s even more upside ahead.
The Wall Street gorilla recently reiterated its year-end price target of 4,800 for the S&P 500. With the benchmark currently hovering around 4,100, JPMorgan’s target implies a potential upside of 16% .
The firm notes how lower market volatility can lead to inflows from systematic investors.
“Together with corporate buybacks, these strategies can provide steady multibillion-per-day inflows into stocks over the next 2-3 months,” Marko Kolanovic, JPMorgan’s chief global markets strategist, wrote in a note to investors. “The trend is that strategies that were heavily short stocks this year are covering shorts.”
Let’s take a closer look at this call — and where the market guru sees opportunities.
The $100 billion catalyst
Technical indicators could play a critical role in the potential recovery.
Kolanovic points out that the S&P 500 “is on the verge of breaking important momentum signals,” such as the 200-day moving average.
On stock charts, the 200-day moving average is shown as a line. Traders can use this line to determine whether the trend is up or down and identify potential areas of support or resistance.
The S&P 500 has been trading well below its 200-day moving average in recent months. Kolanovic suggests that if the index can break above that 200-day moving average, it could lead to inflows “in the order of ~$100 billion.”
We may have to wait a while for that to happen. The S&P 500 fell about 1.2% last week.
Will the Fed pivot?
To tame exploding inflation, the Fed has been aggressively raising interest rates and this has cast a huge shadow over the stock market.
But Kolanovic does not believe the central bank’s aggressive stance will continue.
“[W]They are again outside the consensus and argue that inflation will resolve itself as distortions fade and that the Fed overreacted with the 75 bps hike,” he writes. “This Fed ‘overreaction’ and subsequent, but largely unrelated, decline in inflation will likely lead to a Fed pivot, which is positive for cyclical assets.”
While JPMorgan has a bullish price target on the S&P 500, it isn’t simply suggesting buying the benchmark as a whole.
Kolanovic also cautions against chasing large-cap tech stocks or recession-proof stocks that are already “trading near all-time highs.”
The opportunities he sees are based on valuation.
“There are segments of the market like energy trading at mid-single digit P/Es (below recessionary multiples), and even some broad markets like the small-cap S&P 600 trading at recessionary multiples,” he writes.
Investors can use ETFs to gain exposure to these segments. For example, the Energy Select Sector SPDR Fund (XLE) gives investors easy access to the energy sector of the S&P 500. Meanwhile, investors can use funds like the Vanguard S&P Small-Cap 600 ETF (VIOO) and the SPDR Portfolio S&P 600 Small Cap ETF (SPSM) to track the small cap index.
What to read next
This article provides information only and should not be construed as advice. Provided without warranty of any kind.