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JPMorgan's quant guru Marko Kolanovic has been consistently recommending investors to buy stocks following a more than 10% decline in the S&P 500, arguing that a lot of bad news is already priced in the market.
But that bullishness was slightly tempered on Monday after Kolanovic lowered his S&P 500 year-end price target to 4,900 from 5,050, admitting that risks related to geopolitics and macro forces are bubbling. Kolanovic now expects the S&P 500 to print earnings per share of $235 for 2022, down from $240. That estimate would still represent year-over-year growth of 12%, and is ahead of Wall Street consensus.
The call doesn't change Kolanovic's view that investors should still be buying stocks, including risky innovative stocks that are favored by Ark Invest's Cathie Wood. Instead, Kolanovic sees at least 10% upside in the S&P 500 by year-end, with much of those gains coming in the second half of the year.
The biggest risk to markets right now is a hawkish Federal Reserve that just kicked off a new tightening cycle with an interest rate hike for the first time since late 2018. Russia's invasion of Ukraine and the ensuing spike in commodity prices is another risk Kolanovic has his eyes on.
"With positioning light, sentiment weak and geopolitical risks likely to ease over time, we believe risks are skewed to the upside...That said, we revised down some year-end targets to reflect macro and geopolitical risks, which should ease into the second half of the year," Kolanovic said.
Kolanovic doesn't see a recession happening in the US anytime soon, which has been a concern for many investors as the 2-year and 10-year Treasury yield curve gets closer to inverting.
"We believe this is warranted given strong economic fundamentals, our expectation the 2s10s curve will stay positive this year, and moderating risks of large energy supply disruptions," Kolanovic explained.
Other risks on the radar of the JPMorgan team include rising COVID-19 cases in China, and an elevated and prolonged war between Russia and Ukraine.
"Under this scenario, policy normalization would come to a halt," Kolanovic said.
"Markets have been absorbing significant macro and geopolitical shocks amid an aggressive central bank pivot... While Fed tightening remains the strongest headwind, we believe the market still has upside... We have now cleared the much-anticipated Fed liftoff and the economy is still normalizing from multiple COVID waves," Kolanovic concluded.
