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JP Morgan: Investors are 'overreacting' so buy this market dip for a big rally ahead

  • J.P. Morgan predicts the S&P 500 will rise by 13 percent through year-end 2018, citing valuation and improving fundamentals.
  • "The market appears to be overreacting to sequential negative narratives," the firm says.

The pullback in stocks is a great buying opportunity, according to one top Wall Street firm.

J.P. Morgan predicts the S&P 500 will rise by a double-digit percentage through year-end 2018, citing valuation and improving fundamentals.

The S&P 500 has declined by 7.5 percent since its high for the year on Jan. 26.

"Most of the selling seen over this period has been largely technical (trend-following strategies and option hedging in illiquid market environment), and as such represents a buying opportunity for fundamental investors," U.S. equity strategist Dubravko Lakos-Bujas wrote in a note to clients Tuesday. "The market appears to be overreacting to sequential negative narratives (e.g., inflation scare, rising yields, hawkish Fed, rising deficits), we believe strong macro and fundamentals will continue to prevail."

The strategist reiterated his 3,000 year-end price target for the S&P 500, representing 13 percent upside to Monday's close.

Lakos-Bujas said the S&P 500 is trading at a 16 times forward price-to-earnings multiple, which is lower than its 30-year historical median valuation. He believes the market's fundamentals are "strong" and predicts earnings per share will grow by more than 30 percent over the next two years due to lower tax rates and robust sales growth.

"In our view, there is still room for estimates to move higher given indirect benefits of tax reform are difficult to model (i.e., the impact of dynamic scoring, rising disposable income, higher business investment)," he wrote.