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JP Morgan strategist sees stocks up 10% by the end of 2018 on 'strong' corporate profits

  • A strategist at J.P. Morgan Private Bank sees positive news ahead for equity investors, despite growing fears in the investment community that major indexes may have topped out.
  • The bank expects a continuation of strong corporate profits in the first-quarter reporting season beginning next week.
  • Market turmoil in the first days of April saw its worst second-quarter open since the Great Depression, though the numbers have since rebounded.

A strategist at J.P. Morgan Private Bank sees positive news ahead for equity investors, despite growing fears in the investment community that major indexes may have topped out.

Stocks have had a rocky few months after a historically high 2017. Market turmoil in the first days of April saw its worst second-quarter open since the Great Depression, though the numbers have since rebounded.

"Our central case is that stocks move higher, because we think corporate profits really are the key driver of equity markets, and we see corporate profits looking pretty strong," Grace Peters, a global investment strategist at J.P. Morgan Private Bank, told CNBC's "Squawk Box Europe" Thursday.

The bank expects to get further evidence of this in the first-quarter reporting season that begins next week. Fundamentals like global growth and corporate profits have remained at decade highs over the last year, and have been cited by investors as reason to remain confident in the markets despite a dramatic correction in February and again in early April over interest rate hike apprehension and trade war fears.

"Of course there's always the risk that markets could end lower," Peters said, noting that if the strong economic picture does break down, investors will start questioning valuation, which has been at historically high levels. But she cited the recent market pullbacks as having made valuations look more reasonable in the context of the synchronized growth picture that remains strong.

The strategist was also bullish on tech stocks, despite pressure on the sector following waves of scandal like Facebook's Cambridge Analytica controversy, fears of regulation and production and safety issues surrounding automation and vehicles.

"Technology is one of our key sectors that we're very positive on," Peters said, but specified that the bank has more recently moved preferences from solely internet and FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) toward other, more cyclical parts of the sector. This includes semiconductors and other areas that benefit from structural trends like the cloud and artificial intelligence. "I think regulation is likely to step up, but we still see a very solid structural story for tech."

Pessimism remains

J.P. Morgan's optimism is certainly not consensus. Just on Wednesday, billionaire bond investor Jeffrey Gundlach predicted the year would end with stocks in negative territory, calling it "payback time" for equity investors after an abnormally easy 2017. The call was based on concerns over rising bond yields on fast rising government debt.

Paul Gamble, managing director at advisory group MBMG, described current stock valuations as being in bubble territory, telling CNBC Thursday that "there are conditions out there that are prime for that bubble to actually be pricked."

But J.P. Morgan's assessment remains bright, forecasting around 10 percent by the end of 2018.

"We still think there's healthy returns to be had from global stock markets," Peters said. But she noted the difference between absolute returns and risk-adjusted returns, which take into account volatility. The last year's record low volatility levels enabled high risk-adjusted returns. "On a risk adjusted basis," Peters added, "undoubtedly equities are likely to see a lower return" than 10 percent.