It isn't just a stock market correction, it's a bear market, but fears of the Fed are overdone and investors still have opportunities to buy in, according to J.P. Morgan.
Strategist Marko Kolanovic, who has recommended buying the dip through at previous pandemic-era selloffs, says without a recession in sight, stocks - especially small-caps (NYSEARCA:IWM) and cyclicals (NYSEARCA:XLI) (NYSEARCA:XLE) (NYSEARCA:XLF) (NYSEARCA:XLB) (NYSEARCA:XLY) - offer buying opportunities.
"Stocks are in bear market territory and erased their post-pandemic re-rating, small cap valuations are at 20Y lows, and investor sentiment is bearish," Kolanovic wrote in a note. "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."
"On the valuation side, S&P 500 (NYSEARCA:SPY) post-pandemic re-rating has almost been completely erased with PE now only 0.5x higher vs. pre-pandemic level when rates were more restrictive and fundamentals were less supportive," he said. "Even more extreme, small caps have seen their valuation compress to levels last seen ~20 years ago."
Last week Kolanovic said the bearishness in the market was overdone.
"While jitters around a Fed hiking cycle are understandable, this has been magnified by technical factors that can change quickly - i.e., we could see a reversal of systematic outflows, pickup in buyback activity as we exit blackout windows, and magnification of flows by weak liquidity and short-gamma hedgers," he added.
As long as the "S&P 500 (SPY) remains below ~4600, gamma is negative with dealers buying on strength and selling on weakness. This would amplify market moves, especially in the current low market liquidity/depth environment."
Goldman Sachs recently screened for the best and worst stocks for tightening conditions.