JPM: the upside for stocks remains material
Bears: Equities are already up 23% ytd, a lot is in the price, with no new positive catalysts.
JPM: We disagree, and expect more upside from here, looking at the following catalysts:
1. While equities have performed well this year, they had outflows throughout. Since Jan ’18, US equities saw $225bn of outflows, which fully unwound the inflows seen in ’16-’17, vs fixed income that had $465bn coming in. Retail flows have recently started to return, but it will take more than a few weeks of inflows to compensate for the persistent 18 months’ worth of outflows.
2. Potential for P/E rerating from here should not be dismissed. The latest global equity forward P/E is 16x, which is pretty much the average of the past 30 years. In contrast, global bond yields are almost 300bp below their averages. We think some rerating of P/Es above fair value is likely.
3. EPS revisions have been negative throughout the year, following the weakness in PMIs. We think that one could see the EPS downtrend moderating, similar to ’15-’16 episode. If PMIs bounce, as we project, this should in turn stabilize EPS revisions.