Stocks should rally this week, reverse last week's losses - J.P. Morgan's Kolanovic

Apr. 25, 2022 1:28 PM ETSPDR S&P 500 Trust ETF (SPY)QQQ, SHY, TLT, XLF, TBT, CARZ, JETS, SP500, NDXBy: Kim Khan, SA News Editor49 Comments

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Significant inflows in equities this week should help the stock market rally and recover the sharp losses of the week before, J.P. Morgan says.

"We see risks skewed toward a near-term equity rally given weak investor sentiment, low positioning, systematic strategy buying, seasonality, and oversold conditions," strategist Marko Kolanovic wrote in a note Monday.

Stock inflows will arrive in part due to month-end rebalancing of fixed-weight portfolios, option-related buying after monthly expiry and a reversion from the recent short-gamma trade. Stock buybacks will also increase, he said.

"These should help the market rally this week, and reverse losses from last week."

Last week the S&P 500 (SP500) (NYSEARCA:SPY) fell 2.75%, while the Nasdaq Composite (COMP.IND) lost 3.8% and the Nasdaq 100 (NDX) (QQQ) fell 3.9%. The S&P is down 6.5% this month, while the Nasdaq and Nasdaq 100 are off nearly 10% and on a pace for their worst monthly performance since 2008.

First-quarter earnings estimates should be an easy hurdle for companies, but guidance could be a catalyst for lower second half earnings growth, Kolanovic said.

"While we still expect ~$1Tr of buybacks this year, margin compression and rising debt cost should weigh on buyback growth rate."

The move higher in bond yields (TBT) (TLT) (SHY) is now over and should benefit Financials (XLF), he added.

"Banks are historically strongly correlated to bond yields’ direction, but due to recent growth concerns have opened up a gap with yields," he said. "If the up-move in bond yields stops being seen as a policy mistake and transitory, the gap could close."

In cyclicals, along with financials, the Global Strategy team is overweight commodities, autos (CARZ) and airlines (JETS).

Goldman Sachs said Sunday the possibility of a recession is a good reason for investors to look for stability over pure growth or value.

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