Stock Market Rebound Not Far Off as ‘Fears Overblown,’ JPMorgan Strategists Say

(Bloomberg) -- The negativity in the U.S. stock market has become so overwhelming that a rebound may not be far off, JPMorgan Chase & Co.'s strategists say.

In a note to clients, analysts led by Marko Kolanovic pointed to the closely watched American Association of Individual Investors survey hitting the most bearish mark since early March 2009. That month marked the S&P 500 Index's bottom from the global financial crisis, and it ended up rallying 23% for the year.

“Investor sentiment is reaching extreme weakness,” the JPMorgan strategists wrote. “This, in combination with light investor positioning and better-than-feared Q1 earnings, should allow the market to rebound.”

The strategists' stance is in contrast with some others Wall Street, who see risks piling up that may pull stocks down even more. Morgan Stanley's Michael Wilson, for example, has warned that the S&P 500 will sink to at least 3,800 in the near term and may fall as low as 3,460, a drop of over 16% from Monday's close.

JPMorgan's team disagrees, saying that investors' fears have gone too far. They U.S. economic expansion “is being dented but not derailed” as global growth is expected to rebound in the second half of the year, the strategists said.

“Worries about China's growth outlook, a negative take on the Q1 earnings reporting season, concerns about higher bond yields and further tightening of financial conditions from a strong dollar, all appear to have soured equity and credit investors' sentiment,” the JPMorgan strategists said. “We find these fears overblown.”

To be sure, JPMorgan sees an upside risk to its 2023 inflation forecasts after U.S. employment costs rose by the most on record in the first quarter. The bank anticipates that the Federal Reserve will signal at its meeting on Wednesday that officials will pick up the pace of policy tightening by raising interest rates by 50 basis points and start reducing its massive bond holdings to pull cash out of the markets.

The bank maintained energy as “overweight,” saying the sector is under-owned since its weight sits around just 4% of the overall S&P 500, according to the strategists. They also said it was the cheapest sector on “all valuation metrics.”

“Energy stocks are discounting long-term oil prices well below the spot price of ~$100,” Kolanovic and his team said. “We expect dips to be bought from a broadening investor base, including energy companies revamping share repurchases.”