- The stock market is due for a rebound after notching six straight weeks of losses, according to JPMorgan's Marko Kolanovic.
- He believes too much recession risk has been priced into the stock market as corporate earnings continue to grow.
- "Equities stand to recover if a recession doesn't come through, given already substantial multiple de-rating," Kolanovic said.
After six straight weeks of losses, the US stock market is poised for a recovery as corporate earnings continue to grow, JPMorgan's quant guru Marko Kolanovic said in a Monday note.
He believes the stock market is pricing in too much recession risk, and that equities stand to recover in a big way if it doesn't materialize. That seems like a real possibility given that first-quarter earnings continue to grow and seem healthy, according to the note.
"Equities stand to recover if a recession doesn't come through, given already substantial multiple de-rating, reduced positioning and downbeat sentiment," Kolanovic said.
The S&P 500's forward price-to-earnings multiple has dropped to 16.6x, which is below its 5-year and 10-year average, according to data from FactSet.
"We are also skeptical of the idea that April's equity fund outflow, the highest since March 2020, is only the beginning of a more protracted phase of outflows," Kolanovic said.
Meanwhile, investor sentiment has plunged to "extreme fear" levels, according to CNN's Fear and Greed index, while AAII's weekly investment survey recently showed the highest reading of bearish responses since the depth of the Great Financial Crisis in March 2009.
"Equity markets price in too much recession risk," Kolanovic said, highlighting that the US equity market is currently pricing in a 70% chance of a near-term recession.
And if the Federal Reserve has reached peak hawkishness as interest rates surge and financial conditions tighten, that too could support a move higher in risk assets.
To position for the potential rally in stocks, Kolanvoic recommends investors own emerging market stocks and stay overweight China. Additionally, he expects continued upside in oil and energy stocks and would use any decline as an opportunity to buy the dip.
Kolanovic's rather bullish view on stocks runs counter to recent notes from Goldman Sachs and Morgan Stanley. Both firms see a higher chance for an economic recession that could send the S&P 500 tumbling to as low as 3,400, representing potential downside of 15% from current levels.