Valuations see second biggest drop in 30 years

According to JP Morgan, the stock market is poised for a further bounce in the back half of this year. The bank believes that investor expectations have been reset, which is positive for future returns. “While the activity outlook remains challenging, we believe that the reward for risk-equity looks more attractive.” Loading something.

According to JPMorgan’s Marko Kolanovic, the stock market is set to extend its July rally of about 10% and continue higher in the back half of the year.

That’s because the S&P 500’s peak-to-trough decline of more than 20% this year reset investor expectations enough to skew the current risk-reward profile in favor of the bulls, according to Kolanovic.

“While the activity outlook remains challenging, we believe the risk-reward for equities looks more attractive as we move through 2H,” Kolanovic said.

Kolanovic highlighted that this year’s bear market decline in stocks represented the second biggest drop in the S&P 500’s valuation in 30 years, “more than the typical compression seen during prior recessions.” The S&P 500 saw its price-to-earnings ratio decline by 6.7x, compared to an average compression of 4.5x during the previous recession.

In other words, if you believe that the economy is on solid footing and not in recession, the decline in stocks was overbought.

Of note, helping to boost riskier assets going forward, Fed Chairman Jerome Powell’s recent interest rate hikes are likely to coincide with the peak of inflation.

“More Fed meeting last week, in which the base rate rose to near neutral, with softening inflation expectations and a fall in bond yields, is likely to be behind peak hawkishness. Risk markets are rallying despite some disappointing data releases. , indicating that the bad news was already anticipated,” Kolanovic said.

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Ultimately, Kolanovic stuck to his view that the US economy would survive a recession despite two straight quarters of negative GDP growth. Kolanovic expects GDP growth to rise 1% in the second half of the year.

“There are some encouraging details in the disappointing GDP report as firms sharply slowed the pace of stock formation, and real consumption increased in June as households cushioned the inflation shock with lower savings rates,” Kolanovic said. has continued to do so.”

JPMorgan has a year-end target of 4,800 for the S&P 500, which represents a potential increase of 17% from current levels.

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