S&P 500 Index: Poised to easily reclaim record – JP Morgan

In a Bloomberg interview, JPMorgan Chase & Co.’s Strategist Marko Kolanovic noted that the risks remain titled to the upside for the S&P 500 index, as investors are mispricing virus and election risks.

Key quotes

“While profit expectations have worsened during the coronavirus pandemic, pushing the S&P 500’s price-earnings ratio to" a 20-year high, equities look cheap relative to bonds amid economic stimulus.”

“That could encourage money managers such as pension funds to shift asset allocations from fixed income to stocks.”

“From long-short hedge funds to computer-driven traders, equity positioning has been stuck below where it is typically.”

“Should their holdings reach the historic median, that would mean an addition of $400 billion in stock exposure that could “easily push the broad market to new highs.”

“Many investors did not participate in the equity rally. The argument against the rally is that given earnings forecasts impacted by Covid-19, equities are expensive relative to history.” 

“What this argument is missing is that large pools of money invest not just within equities but across asset classes.”

“Managers are buying mega-cap tech and momentum stocks while shorting smaller cyclical and value stocks. This trade is in part driven by market expectations for the Covid-19 pandemic to worsen (or not get better) and lead to permanent shifts in the economy.”

“We think the market is not properly pricing either of these events, a repricing of which could result in a rapid momentum selloff and value rally.”