There are three certainties in life: death, taxes and a weekly dose of stock market pep talk from JPMorgan's head of global strategy, Marko Kolanovic. Today is an example of the third, because in the latest weekly highly anticipated JPMorgan View note...
Marko's note today should be interesting— zerohedge (@zerohedge) January 24, 2022
... the Croat who two weeks ago infamously said to buy the dip (echoing another JPMorgan strategist, Mislav Matejka, saying exactly one week earlier that it's time to stay bullish as "positive catalysts are not exhausted", which in turn followed the third JPM Croatian strategist, Dubravko Lakos-Bujas saying precisely the same in late December, urging traders to buy high-beta stocks and so on) said - what else - that "market worries around rates and corporate margins are overdone", in other words, it's time to buy the dip again.
Here is the key excerpt.
Market worries around rates and corporate margins are overdone: The recent pullback in risk assets appears overdone, and a combination of technical indicators approaching oversold territory and sentiment turning bearish suggest we could be in the final stages of this correction.
The market’s biggest worries seem to now be revolving around the Fed and the implications of rising rates. The moves thus far have been anything but calm. Real yields have risen about 50bp ytd, effectively accounting for more than the upward move in nominal yields. Technical factors have magnified the price action but the repricing of the Fed and other DM central banks was the catalyst to nudge yields forcefully in the direction of fair value. With valuations now less demanding, technical indicators having recently reached oversold RSI territory and positioning seeming to have adjusted, it feels like most of the high volatility upward move in yields could be behind.
Looking ahead, Kolanovic believes earnings season will be far stronger (so ignore the caution voiced by Goldman), and says that "in a worst case scenario could see a return of the “Fed put”."
While the market struggles to digest the rotation forced on it by rising rates, we expect the earnings season to reassure, and in a worst case scenario could see a return of the “Fed put”.
Some more on earnings:
We remain very positive on earnings outlook for 2022, expecting another year of significant beats. Q4 activity momentum has seen a firming vs the summer, with global PMIs higher, a bounce in Asia, and easing in certain bottlenecks. On the other side, consensus EPS growth expectations are lower than what was delivered in Q3, creating a favorable tradeoff. Q4 EPS growth rate projection by IBES stands at 19%yoy in the US and 12% in Eurozone, down vs Q3 delivered of 40% yoy. Ex Energy, and median, the hurdle rate is even lower for Q4, around 8-10% yoy. In absolute terms, the S&P500 Q4 forecast is outright down vs Q3 delivered EPS. This is likely too conservative, with the Q4 reporting season expected to deliver another quarter of beats. Margin commentary is likely to be in focus. PPIs suggest margins could have been even stronger last year, and our margin proxy – the difference between corporate intentions to raise prices vs intentions to raise wages, is staying elevated.
We expect profit margins to remain resilient, as they are positively correlated to activity. At the sector level, interestingly, the consensus is very cautious on Financials and Materials, with these displaying the lowest EPS growth projections vs typical, but they historically showed the biggest positive beta to GDP growth. We are OW both Banks and Mining, as Banks earnings are leveraged to short rates, which are moving higher, and the Mining sector is a play on the likely turn in China.
The bottom line:
In any case, the near-term pullback in risk assets is overdone in our view. Markets had their worst month since 2H20, and a combination of technical indicators approaching oversold territory and sentiment turning bearish (AAII bulls to bear ratio in the bottom 5th %ile) suggest we could be in the final stages of this correction. In addition, while the market struggles to digest the rotation forced on it by rising rates, we expect the earnings season to reassure (despite the rocky start from Financials) and worst case scenario, we are not averse to the idea that the “Fed put” may stage a comeback. In the medium term, the prospect of a China bounce would be a meaningful and timely infusion of optimism as the long-awaited policy pivot takes root.
Kolanovic also presents the answers to the latest investor poll. It found that
- equity exposure/sentiment among respondents is ~61st percentile on average;
- 75% plan to increase equity exposure, and 76% to decrease bond duration near-term;
- expectations around ECB policy are dispersed, with the median respondent expecting the first rate hike in 1H23 and looking for 2 hikes by the end of 2023;
- USD expectations were also scattered, though ~60% of respondents expected it to strengthen at least until Fed liftoff;
- 76% don’t plan to hedge their portfolios against escalating tensions in Ukraine.
What to make of all this? Well, it's anyone's guess what the market will do next (and as we will show in a susbequent post using data from JPM Prime, the picture is not nearly as clear as presented by Kolanovic). However, one thing we can be certain of is that no matter what happens in the next 7 days, next Monday Kolanovic will be out, telling clients to BTFD because this time the market will surely will bounce.