Despite hawkish stance of the Federal Reserve and rising treasury yield spooking sentiment of the investors, equities can continue rising, according to JPMorgan Chase & Co.’s strategist Marko Kolanovic.
In a note to clients, Marko noted, “too much negativity rather than too much complacency in markets,”. His research team cite three reasons for their optimistic outlook:
- Both equity and credit markets have historically fared well at the start of monetary tightening cycles
- Even as nominal bond yields and rates rise, “the real policy rate is extremely negative and thus simulative” and it’s too early to take inversion as a signal of recession risk
- Not all central banks are tightening, as the Bank of Japan and People’s Bank of China are moving in the opposite direction, and equities “look likely to see some support from fiscal stimulus” in those countries
Equities selloff in global markets have quickly recovered triggered by Russia’s invasion in Ukraine. Surge in commodity prices and inversion in parts of the yield curve although have raised concerns of economic slowdown, these concerns are limited to the bond markets with equities shrugging off recession risks.
Strategists at JP Morgan opposes market sentiment rather notes economic indicators are beating expectations and it is too early for recession.
“These positive economic surprises are likely to translate into earnings surprises in the coming reporting season,” they said in their note. In fact, with forecasts projecting a “large sequential decline” in S&P 500 profits, “the hurdle for the coming earnings reporting season, which kicks off in the U.S. in about two weeks, seems rather low.”
