After registering its first setback of just over 5% in almost a year, equities are once again at all-time highs. While the bears continue to signal a host of concerns, from JPMorgan, their strategist Mislav Matejka makes clear that the relationship between reward and risk for the stock remains positive.
In this regard, it justifies that China’s slowdown in growth is already behind us largely with an improvement ahead, while concerns about credit problems in the Asian giant, in reference to Evergrande Group, are expected to remain manageable.
Regarding the Delta variant, JPMorgan strategists continue to be encouraged by the significant difference between cases and hospitalizations, being new restrictions unlikely significant in both the US and Western Europe. They also indicate that there are already signs that supply restrictions may be past their worst and that energy prices will begin to normalize.
At the same time, the labor market, a key driver of consumption, “remains strong and is more likely to offer positive surprises regarding the boost in activity than disappointment,” explains Matejka in a report distributed to his clients.
This expert highlights how continued fiscal support and credit spreads remain in good shape. It also states that although the Federal Reserve begins its tapering (reduction in the purchase of assets) unlikely to deliver a sharp turn of hardening, still giving “the benefit of the doubt” to inflationary pressures. An argument that is also valid for the European Central Bank.
“We believe that the main central banks will remain moderate, which will translate into steeper curves, which is a tailwind for stocks,” he clarifies.
“The cushion before higher yields hurt the broader market is still important”
In this sense, he believes that equities will be able to tolerate tapering, since excess liquidity it is still broad. He also expects company profits to continue growing and mentions the positive surprises about third-quarter results.
“In absolute terms, the multiples of the PER are high, but the yields of equities versus those of credit and bonds are not. The cushion before the increase in yields hurts the market in general continues to be important,” he emphasizes .
Hence, I estimate that equities are likely to tolerate tapering for the time being and too early to spot a “bug” of monetary policy by central banks. As determined, domestic market leadership will become more cyclical, hence recommending long positions in energy, banks, automobiles and mining.
With the new highs reached by the S&P 500, this indicator has officially completed its eleventh recovery after a decline of more than 5% since the global financial crisis. While this was one of the least severe of the 11 episodes, the recovery to new highs has been one of the quickest. November has historically been one of the best months of the year for the stock market.
Goldman expects liquidity in S&P 500 companies to inflate buybacks by 8% in 2022
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