JP Morgan: Bull market has not peaked yet; buy bank stocks

  • J.P. Morgan forecasts the S&P 500 will rise 15 percent by year-end 2018.
  • "As much as we think this cycle will end through an overheated economy that requires a restrictive Fed (real policy rates above 1%), we do not think risky markets should peak this early in that endgame process," the firm's strategist writes.
Joseba Etxaburu | Reuters

The sell-off in stocks this month is a buying opportunity, according to one top Wall Street firm.

J.P. Morgan predicts the S&P 500 will rise 15 percent into year-end 2018.

"Global markets are delivering one their most negative reactions to a bond market sell-off in 15 years, at least judged by the spike in equity volatility … and intra-month drops in share prices," strategist John Normand wrote in a note to clients Saturday. "And as much as we think this cycle will end through an overheated economy that requires a restrictive Fed (real policy rates above 1%), we do not think risky markets should peak this early in that endgame process."

Normand says he recommends clients buy stock over bonds, specifically bank and industrial stocks.

The S&P 500 fell officially into correction territory on Thursday, down more than 10 percent from its record reached in January. The benchmark rebounded by 1.5 percent on Friday.

Normand noted the market tends to have multiple so-called "canary" sell-offs before the final peak.

Source: J.P. Morgan

The strategist said the current corporate earnings season is "strong" so far with earnings growth of roughly 15 percent year-over-year.

"Our Global Equity Strategy team believes that equities will extend their decline only if bond yields fall from here," he wrote. "The typical red flags — credit and peripheral spreads — remain well behaved. Finally, equities are a beneficiary of stronger and more sustainable topline growth driven by the higher wages, as well as from better corporate pricing power, which should all support earnings."

The firm reiterated its 2018 S&P 500 year-end price target of 3,000, representing 15 percent upside to Friday's close.

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