JPMorgan Chase says the market is witnessing a disconnect between sentiment and earnings, prompting the bank to urge investors to focus on one investment theme.
In a new CNBC interview, JPMorgan Asset Management global market strategist Meera Pandit says the market is being torn between bearish sentiment and resilient earnings.
According to Pandit, the divergence could last throughout the year.
“There are two major things going on in the markets right now. One is this tension between sentiment and fundamentals, which I think will probably be with us for the whole year because it was with us before the war. And while right now market sentiment is very sensitive to headlines, if you look at the fundamentals within the economy, if there is a war going on, nobody told earnings estimates because you see earnings estimates for the S&P 500 going from 15% coming into the year to now 17% as we’re on the eve of earnings season.”
Pandit also says corporate guidance continues to support a strong earnings outlook, but it could change if oil prices stay elevated.
“So ultimately, it’s actually looking like earnings could be even stronger than the prior two years when we had double-digit earnings growth. And a lot of the guidance you’re getting from companies is still positive.
Now, even if we see some of that revised back because of some of these challenges due to higher energy prices and higher input costs, you’re still likely to end up with a year with very strong fundamentals paired with very sour sentiment.”
Under the current market environment, the JPMorgan strategist suggests that investors should focus on names that will benefit from the massive AI spending.
“Now it’s about this infrastructure layer where we’re moving from the big spenders of capital to the recipients of capital. And again, you’re seeing that across a lot of the value-oriented sectors, whether it’s industrials, materials, utilities, that power story, all the different commodity inputs.”
Looking at the Mag 7, she says the group is witnessing a valuation decline amid the pullback, noting some names are offering a solid opportunity for stock pickers and dip buyers.
“And I don’t think we can necessarily ignore tech either. I mean, you look at some areas like the Mag 7, which went from 29x in terms of valuations at the beginning of the year, now to 23x. So we want to be mindful of what you already own in your portfolio and that exposure.
But you’re seeing correlations even within the Mag 7 drop pretty significantly. So now you do have that opportunity to pick and choose in the areas where you do think have a little bit more longevity, even within that tech layer. But it’s really about the recipients right now in terms of infrastructure when we think about the trade evolution.”
As of Wednesday’s close, the S&P 500 is trading at 6,575.
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