The recent mini-correction in stocks has been driven mostly by technical factors and should reverse as companies progress through earnings season, according to J.P. Morgan strategists.
One of the key figures will be share buybacks, which have propelled much of the nine-year-old bull market and will resume as more S&P 500 companies report and emerge from the pre-earnings quiet period. Other factors cited that could contribute to a turnaround include a generally stronger profit outlook, a decline in volatility and current bearish positioning that will reverse as confidence returns.
"Ultimately, the evolution of fundamentals rather than technicals will dictate the duration and end of this cycle," Dubravko Lakos-Bujas, head of U.S. equity strategy at J.P. Morgan, said in a note to clients. "Tame inflation combined with a still positive earnings backdrop and non-inflationary growth should allow this bull market to run for longer."
Lakos-Bujas sees the technical-driven selling as about 80 percent over. Systematic strategies along with commodities trading advisors are helping to drive the drawdown, which saw the S&P 500 shed about 7 percent at one point.
The major averages have climbed back and recovered much of their losses, though Thursday saw another decline after minutes from the most recent Federal Reserve meeting, released Wednesday, indicated the central bank remains committed to a steady diet of interest rate hikes ahead.