Uptick likely this week on buybacks, says Kolanovic

  • 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 rebalancings of fixed-weight portfolios,” Kolanovic said.

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

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

“We see skewed risks to a near-term stock rally given weak investor sentiment, under-positioning, systematic buying of strategies, seasonality and oversold conditions,” Kolanovic said in a note on Monday, adding which expects significant inflows into the shares from the month. finalize the rebalancing of fixed-weight portfolios.

Additional tailwinds for the stock market this week include option-related buying after the monthly expiry and the reversal of a major short-range sell-off that occurred last week.

“Last week there was a maximum buyback blackout, and going forward the positive role of buybacks will also increase. This should help the market recover this week and reverse last week’s losses,” he predicted. JPMorgan has previously estimated that corporate buybacks will reach a record $1 trillion this year.

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

To position themselves higher in the stock market, Kolanovic recommends investors take a bar approach to their portfolio, owning a mix of traditional growth stocks and traditional value stocks that have favorable attributes on most factors.

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

“Bottom line, if FANG is fair value, I’m not sure the stock is at an additional significant downside,” Lee said.

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