The stock market will recover all of its 2022 losses by year-end as the economy avoids recession and Ukraine risks lessen, JPMorgan says

The stock market is poised to erase all of its losses and finish the year flat, according to JPMorgan’s quant guru Marko Kolanvoic.

That would be quite the feat, given that the S&P 500 was down nearly 20% at its low last month as investors worry about rising inflation, higher interest rates, and the potential of an economic recession.

But Kolanovic reiterated his view in a note on Wednesday that the US will avoid a recession this year thanks to a strong US consumer, a continued post-COVID economic reopening around the world, and the reopening of China’s economy following stringent COVID-19 shutdowns.

The big risk for markets is still the ongoing Russia-Ukraine conflict, which has roiled commodity markets and led to ongoing supply chain disruptions. But Kolanovic said he expects a “settled solution” to the conflict to materialize in the second half of the year. If that’s the case, much of the commodity pressure could ease, helping tame inflation.

Also helping prop up the stock market is corporate buybacks, which are poised to hit a record annualized level of $1.2 trillion, according to Kolanovic. But investors remain concerned about the Federal Reserve’s path towards tightening monetary policy, as it kicks off its $9 trillion balance sheet reduction strategy today.

Yet, Kolanovic thinks that potential headwind is already priced into markets.

“The market already absorbed and priced in the change in monetary policy and significant tightening of financial conditions as inflation peaked or is peaking now,” Kolanovic said.

And inflation is likely on the verge of peaking due to temporary and year-over-year comparable effects, which should give the Fed some breathing room to take a break in its interest rate hikes ahead of US midterm elections, according to Kolanovic.

One final boost to the stock market into year-end will be from retail investors.

“Retail buying that was last year funded with stimulus checks likely will not stop as it can now be funded by job paychecks, which is also more sustainable,” Kolanovic said.

Kolanovic’s bullish view on the stock market doesn’t mean investors should indiscriminately buy the entire market. Instead, Kolanovic advocates for investors to buy beaten down innovation stocks rather than stocks that are perceived to provide protection during an economic recession.

“While a recession (in our view) will not happen, these stocks that are trading near all-time high valuations are not a hedge for any scenario: if there is a recession, multiples will go down, and if there is no recession, there will be rotation out of these stocks into higher beta, smaller capitalization market segments in both growth and value,” Kolanovic said.

“May is a template for the year, [and] record dispersion provides opportunities,” Kolanovic concluded. The S&P 500 finished May virtually flat.

Read the original article on Business Insider

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