Rally Likely This Week on Buybacks, Kolanovic Says

  • US stocks are poised to rebound this week after falling last week, JPMorgan’s Marko Kolanovic said on Monday.
  • He sees poor investor sentiment and the return of corporate buybacks as reasons to expect a rally.
  • “We expect significant inflows into equities this week from month-end rebalances of fixed weight portfolios,” Kolanovic said.

Despite significant declines in the stock market last week and today, JPMorgan’s Marko Kolanovic expects a rebound to materialize later this week.

Specifically, he believes a combination of poor investor sentiment, a return of corporate buybacks, and favorable seasonal trends will push the stock market higher from here. And the rally should be big enough to erase all of last week’s losses, which amounted to about 5%.

“We see risks skewed toward a near-term equity rally given weak investor sentiment, low positioning, systematic strategy buying, seasonality, and oversold conditions,” Kolanovic said in a Monday note, adding that he expects significant inflows into equities from the month-end rebalancing of fixed weight portfolios.

Additional tailwinds for the stock market this week include option-related buying post monthly expiry, and the reversion from significant short gamma selling that transpired last week. 

“Last week was peak buyback blackout, and going forward the positive role of buybacks will also increase. These should help the market rally this week, and reverse losses from last week,” he predicted. JPMorgan has previously estimated that corporate buybacks will hit a record $1 trillion this year.

Also aiding Kolanovic’s bullishness on stocks is his expectation that corporate earnings will continue to grow, which is ultimately the key driver for stock prices. Even after slightly revising down his 2022 S&P 500 earning per share estimate to $230 from $235 due to rising input costs, that still implies year-over-year growth of about 10%.

To position for upside in the stock market, Kolanovic recommends investors take a barbell approach to their portfolio, owning a mix of both traditional growth stocks and traditional value stocks that have favorable attributes across most factors. 

This is a rare setup for investors: when value stocks like the energy sector see surging earnings growth while fast-growing tech stocks enter value territory due to steep declines. That’s the exact argument Fundstrat’s Tom Lee made for mega-cap FANG stocks on Monday.

“Bottom line, if FANG is reasonably valued, not sure there is a case for stocks to have significant further downside,” Lee said.

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