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Between the Federal Reserve's expected interest rate hike on Wednesday and the ongoing squeeze in commodity prices due to Russia's invasion of Ukraine, the stock market has priced in a lot of negativity.
That's according to JPMorgan's Marko Kolanovic, who said in a Monday note that the S&P 500's year-to-date decline of 12% represents an opportunity that investors with a medium-term time horizon should take advantage of.
His confidence stems from the belief that he doesn't expect the US economy to enter a recession, noting that consumers and corporations currently have healthy balance sheets.
"We think that outright recession should not be a base case given continued favorable financing conditions, very strong labor markets, an unleveraged consumer, strong corporate cash flows, strong bank balance sheets, a turn for the better in the China policy outlook, and the COVID-19 impact should be fading further," Kolanovic said.
Of course, there are still risks abound. While Russia has historically represented a tiny fraction of America's economic trade, it is a substantial producer of commodities that can indirectly weaken the US consumer and slow economic growth as prices for goods rise.
But despite the risks of surging oil prices, a continued rise in inflation, and this Wednesday marking the Fed's first tightening cycle since late 2018, much of that is already apparent to the stock market.
"A lot of risk is already priced in, sentiment is depressed and investor positioning is low, so we would add to risk with a medium-term horizon," Kolanovic said.
And prior periods of Fed rate hikes have actually proven to be bullish for the broader stock market. "Equities tended to firm up 3-4 months after the first hike, and make fresh all-time highs within 6-12 months," he added.
One potential big opportunity Kolanovic sees for investors is Chinese stocks, which have been slammed in recent weeks due to a number of COVID-19 outbreaks leading to lockdowns and regulatory roadblocks imposed by both China and the US.
But China's "front-loaded stimulus, reopening and relative insulation from current geopolitical flashpoints" mean the country should receive an overweight from investors, he said. The MSCI China ETF is down 27% year-to-date.