Recession Fears Are Overdone in Small Caps, JPMorgan’s Kolanovic Says

(Bloomberg) -- JPMorgan Chase & Co. strategists led by Marko Kolanovic say it's time to buy beaten-down stocks such as small caps after those companies priced in an economic recession that's unlikely to come true.

“Many market metrics such as recent performance of high vs. low beta stocks and valuations of small caps are already fully pricing in a recession -- something we do not see materializing,” Kolanovic wrote in a note to clients. “The equity market sell-off is overdone in our view, and we reiterate our call to buy the dip, particularly in cyclicals and small caps.”

Read: Bearish Bets on Small Caps Ease With Analysts Seeing More Gains

Stocks rebounded Monday, after concern over Federal Reserve tightening sent equity benchmarks to one of the worst starts of a year in decades. The Russell 2000 of smaller companies advanced more than 2%, extending a similar bounce from Friday. Last week, the index entered a bear market as a selloff from its record topped 20%.

Kolanovic, a steadfast equity bull who favors cheap, economically sensitive stocks, said investor fear of a Fed policy mistake is misplaced. While JPMorgan now anticipates the U.S. central bank will raise interest rates seven times through March 2023, he expects the backdrop of above-trend economic expansion and corporate earnings to help the market weather the hit from the valuation front.

“While jitters around a Fed hiking cycle are understandable, this has been magnified by technical factors that can change quickly,” he wrote. “We could see a reversal of systematic outflows, pickup in buyback activity.”