JPMorgan’s Kolanovic sees earnings growth powering S&P 500 higher as yields stabilize

Published Thu, Mar 18 20216:38 PM EDTUpdated Thu, Mar 18 20217:35 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

JPMorgan 's Marko Kolanovic told CNBC on Thursday he expects bond yields to stabilize in the coming weeks, clearing the way for stocks to move higher on the backs of strong earnings growth. The firm's chief global markets strategist said in an interview on "Fast Money" that he sees the S & P 500 rising to 4,400 in the "mid-to-medium term," representing about 12% upside from Thursday's close of 3,915.46. The broad equity index fell 1.5% Thursday , after notching a record close in the prior session. The move in stocks came as the 10-year Treasury yield rose again, reaching 1.75% at its peak Thursday, a level not seen since January 2020. While the rapid rise in bond yields has rattled equity investors this year, taking the wind out of the sails of many high-growth technology stocks, Kolanovic said he anticipates a relative calming on the horizon. "We are now coming into the month-end and quarter-end time period where there is a lot of rebalances" in bond-equity portfolios, Kolanovic explained. He predicted some inflows into bonds, helping to limit the rise in yields, which move inversely to price. "Now, some of these portfolios may sell equities, which would put some downward pressure," added Kolanovic, who was promoted by JPMorgan earlier this month . "However, if yields stabilize and if yields tick lower, you would just see, actually, Nasdaq and some of the yield-sensitive stocks move higher, which we think is going to more than compensate for some of these equity outflows." The yield on the 10-year Treasury began the year below 1%, but it's marched upward as investors anticipate a strong economic rebound from the coronavirus pandemic and a resurgence of problematic inflation. Kolanovic said his team is overweight "cyclicals, value and emerging market stocks," describing them all as areas that could benefit if inflation does pick up. The strategist cautioned, however, that he does not expect there to be "runaway inflation" that would rock equities broadly. Rather, he said he expects a strengthening economy that lifts corporate earnings, with those higher profits serving as the primary upside catalyst for stocks. Expanding price-to-earnings ratios may also drive equity prices upward, he said, but he contended that would likely transpire in cyclical stocks that benefit from an economic reopening, not growth stocks boasting already-stretched valuations. If anything, he said, there could be further multiple compression for growth stocks. "You could have some more multiple expansion on these cyclical laggards that were lagging for a number of years," Kolanovic said, pointing to energy, materials and industrials. "In financials, some rerating happened already, and there's quite still a bit of dispersion," he added.

Traders on the floor of the New York Stock Exchange

Source: The New York Stock Exchange

JPMorgan's Marko Kolanovic told CNBC on Thursday he expects bond yields to stabilize in the coming weeks, clearing the way for stocks to move higher on the backs of strong earnings growth.

The firm's chief global markets strategist said in an interview on "Fast Money" that he sees the S&P 500 rising to 4,400 in the "mid-to-medium term," representing about 12% upside from Thursday's close of 3,915.46.

The broad equity index fell 1.5% Thursday, after notching a record close in the prior session. The move in stocks came as the 10-year Treasury yield rose again, reaching 1.75% at its peak Thursday, a level not seen since January 2020.

While the rapid rise in bond yields has rattled equity investors this year, taking the wind out of the sails of many high-growth technology stocks, Kolanovic said he anticipates a relative calming on the horizon.