J.P.Morgan Trim S&P 500 EPS View

J.P.Morgan note that “this year is the fifth worst start for S&P 500 since 1927. Markets have been absorbing significant macro and geopolitical shocks including higher and more persistent inflation amid an aggressive central bank pivot. We are adjusting our 2022 S&P 500 EPS estimate from $240 to $235 (still strong growth of +12% Y/Y) to reflect these headwinds, although the consensus revisions are still catching up (now at $227, up ~$4 YtD), and expect the S&P 500 to finish the year at 4,900. We continue to favour the energy sector due to steadily improving fundamentals, while also see increasing room for growth stocks (including segments of high beta/hyper growth) to work given more reasonable valuation and flushed positioning. As for performance, equity markets are already discounting significant negative news and equity positioning (ex-retail) is at the lowest level since 2020. The average U.S. stock reached bear or recession territory in recent weeks - for the S&P 500, Russell 2000, Nasdaq Composite the average stock drawdown from 12-month highs is -21%, -40%, and -47% respectively. The breadth of these declines is similar or worse than prior major sell-offs (i.e., 2018 trade war, 2010/2011 Euro debt crisis) and has passed the half-way mark typically seen during recessions.”

• “While Fed tightening remains the strongest headwind for the economy, we believe the market still has upside. Investor sentiment is extremely poor and positioning very low. We have now cleared the much-anticipated Fed liftoff with policy likely as hawkish as it gets. The economy is still normalizing from multiple COVID waves with labor supply expected to expand further while households are lapping record stimulus and price inflation. These risks are largely frontloaded and compressed into the first few months of this year, setting up for a potentially more normal second half. China is reinforcing its support for the economy and markets. While geopolitical tensions could remain elevated, commodity supply shocks are so far less than feared and Europe is considering new fiscal measures to shore up its economy. In our view, the economy should transition out of an intra-cycle slowdown rather than sliding into a recession. The key risk to our view the Fed could aggressively prioritize price stability over slowing growth, ultimately resulting in a policy error. Also, elevated geopolitical tensions persisting beyond several months could present significant downside risk to fundamentals (declining demand, lower investment activity, margin pressure, credit losses).”