- A peak in inflation means the Federal Reserve is likely to pivot away from interest rate hikes, according to JPMorgan.
- The bank thinks investors should tactically favor growth stocks as a slowdown in rate hikes from the Fed would spark risk-on positioning among investors.
- "Both growth and tech are doing better of late, and this should be a clear support for the overall market levels," JPMorgan said.
A pivot by the Federal Reserve away from interest rate hikes could be imminent as inflation shows signs of peaking, JPMorgan said in a note on Monday.
Such a move by the Fed would likely jump start a resurgence in risk-on positioning among investors, which is why the bank recommends investors tactically buy growth stocks for more upside ahead.
The Fed kicked off its current tightening monetary policy in March with a 25-basis-point interest rate hike. Since then, it has raised rates by another 125 basis points, and is expected to increase rates by another 75 basis points at its meeting this Wednesday in a bid to fight off 40-year highs in inflation.
But JPMorgan has confidence that inflation could be starting to roll over based on falling PMIs, a potentially peaking US dollar, a softening job market, and most importantly, the level of oil prices, which have dropped about 20% since early June.
And while the oil decline likely signals softening demand, it also means a cooldown in inflation, JPMorgan said. The average price for a gallon of gas fell to $4.35 after topping $5 earlier this summer, according to AAA.
"The reset in activity is what many want to see in order to be able to start looking through, positioning for the inflection higher," JPMorgan's Mislav Matejka said.
That sets the market up for a new environment in which bad news is viewed as good, "in the same way that the resiliency earlier in the year was not rewarded, as it enabled the Fed to keep focusing solely on the inflation risk," Matjeka said.
Bad news in the economy means the Fed could begin to reset some of its focus away from inflation and towards the jobs market, which could ultimately result in a pause in rate hikes as the central bank tries to gauge the impact of its recent tightening on economic growth.
The "bad news is good news" environment also applies to corporate earnings, and could signal that a bottom in the stock market has been reached.
"The bearishness on earnings is pretty unanimous, which we argued could lead to a phase of weaker earnings being seen as good. Q2 results are coming out softer than typical, but equity markets have been holding up well through these," Matejka said.
Combined with depressed investor and consumer sentiment readings, it could be a perfect storm for investors to add exposure to growth stocks for more upside in the second half of the year.
"We believe that the turn in the growth-policy tradeoff as we move into 2H means that bond yields are likely to be stalling, arresting their sharp past upmove. This was one of the reasons why we advised to tactically reverse our preference for value over growth style. We think the most recent rebound in growth stocks is likely to continue," Matejka said.