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JPMorgan Amps Up Its Bullish Call for the S&P 500

JPMorgan Amps Up Its Bullish Call for the S&P 500

(Bloomberg) -- JPMorgan Chase & Co. is turning more optimistic about the stock market as the S&P 500 Index sets a record high.

Equity strategists led by Dubravko Lakos-Bujas, who had forecast the benchmark would climb to 3,200 by the middle of next year, now say it could reach that level by December or in early 2020. Their price target implies about a 6% gain from Friday’s close.

JPMorgan Amps Up Its Bullish Call for the S&P 500

The global economy, as suggested by JPMorgan’s business cycle indicators, is in a “synchronized” recovery for the first time in six months. That, combined with easing U.S.-China trade tensions and 23 cuts in interest rates projected for central banks worldwide in the fourth quarter, will help fuel a U.S. corporate earnings rebound, according to the strategists.

The business cycle and fundamentals are “at an inflection,” they wrote in a note to clients. “Earnings growth should trough in 3Q with a more pronounced recovery by early next year.”

The S&P 500 was up 0.6% at 3,040 in late-morning trading Monday, poised to close at an all-time high for the first time since July. The Federal Reserve is expected to cut interest rates this week for a third time this year while President Donald Trump is set to sign the initial phase of a trade deal with China next month, all helping bolster investor sentiment.

JPMorgan Amps Up Its Bullish Call for the S&P 500

At odds with JPMorgan’s bullish stance is Morgan Stanley, where strategists led by Mike Wilson warned investors to watch for a market correction. It’s too early to call the all-clear for the earnings slowdown as the number of companies providing lower financial forecasts continued to outnumber that for higher guidance by a ratio of 3-to-1, Wilson said.

Moreover, Morgan Stanley’s Global Risk Demand Index just exceeded its July peak to reach the highest level since April. Similarly extreme readings tend to foreshadow market pullbacks, Wilson pointed out.

“Our view remains that both economic and earnings growth is likely to remain soft into 2020 with significant revisions to consensus forecasts still to come,” Wilson wrote in a note. “With our Global Risk Demand Index back at extreme levels and the S&P close to the top end of it’s very well established channel of the past few years, there is now elevated risk again for a correction at the index level.”

JPMorgan Amps Up Its Bullish Call for the S&P 500

In contrast, strategists at JPMorgan says investors have yet to embrace risk. Hedge fund managers have kept their equity exposure at low levels and while the S&P 500 broke out to new highs, the latest leg has been led by defensive shares such as utilities.

“The upside should be supported by still very low net positioning across discretionary equity and macro hedge funds, as well as systematic approaches (i.e. Vol Targeting just recently started re-leveraging),” the strategists led by Lakos-Bujas said. They recommended investors favor small-caps and cyclical shares such as energy as they are poised to outperform amid a pickup in growth.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Richard Richtmyer, Brendan Walsh

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