Last week, global markets were hit with a widespread shock that weighed on nearly all asset classes, encompassing even the cryptocurrency space, once viewed as a type of "safe haven" bet unrelated to the broader market. While some bears are calling for tougher times ahead, one team of analysts on the Street views the recent weakness as tied to a heavy round of technical selling and an earnings-related pause in corporate share repurchases. As both of these negative headwinds run their course, bulls at JPMorgan expect a market rebound, translating into gains for investors tough enough the weather out the storm.
'Temporary Correction Within an Ongoing Bull Market'
In a note to clients on Thursday, JPMorgan equity strategist Dubravko Lakos-Bujas and team forecasted for U.S. equities to make a comeback as fundamentals come back into play, highlighting stock buybacks as a key driver of the nine-year-bull market, as reported by CNBC. Stock repurchases are set to resume after a blackout period pre-earnings, with the Street forecasting firms to buy more than $1 trillion of their own stock this year.
“With the largest one-way buyer returning in size to the market post-earnings, we expect liquidity to improve and equities to move higher," wrote the JPMorgan analyst.
Lakos-Bujas pointed to a handful of other variables which could boost a market turnaround, including a generally improved profit outlook, a decline in volatility and the current bearish sentiment on the Street which he expects to reverse as confidence increases.
"Tame inflation combined with a still positive earnings backdrop and non-inflationary growth should allow this bull market to run for longer," he added.
The analyst indicated that it's just a matter of time before technicals again take the backstage to longer-term fundamentals, signaling the close of this "temporary correction within an ongoing bull market." According to JPMorgan's estimates, we are about 80% through the period of technical-driven selling, which includes systematic strategies and commodities trading advisors.
Lakos-Bujas recommends investors buy small-caps citing a favorable risk-reward picture given the S&P 500 and Russell 2000 reached "extremely oversold" levels last week. He also likes mega-caps, which he expects to gain from defensive positioning that existed heading into the sell off and which he expects to reverse after another solid earnings season.