Longer-term fundamentals indicate that the downdraft should pass soon, Lakos-Bujas said.
Wall Street figures companies will buy back upwards of $1 trillion of their own shares this year, thanks in part to a windfall from last year’s tax cut, which lowered the corporate rate and provided incentive to repatriate profits stored overseas. The buybacks will help improve market liquidity and inspire confidence about the overall market picture, according to the J.P. Morgan report.
The current situation is “a temporary correction within an ongoing bull market,” Lakos-Bujas wrote.
In particular, the firm likes small-cap stocks because of their risk-reward picture as well as mega-caps that will benefit from defensive positioning that prevailed heading into the sell-off and could reverse after another strong earnings season. The S&P 500 collectively is expected to show a year-over-year profit gain of 19.1 percent, according to the latest FactSet estimates.
Both the S&P 500 and the Russell 2000, which tracks small-cap stocks, hit “extremely oversold” levels last week, according to the analysis.
“In addition to being cheap in absolute terms, valuation looks even cheaper if taken in context of low global interest rates,” Lakos-Bujas said.
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