JPMorgan's quant guru says US stocks will climb back to record highs in the first half of 2021

Associated Press
  • JPMorgan’s top quantitative analyst sees aid from the Federal Reserve and summer sunlight bringing a market rebound sooner than initially expected.
  • The S&P 500 will return to past highs in the first half of 2021, Marko Kolanovic wrote in a Tuesday note, compared to a previously forecast resurgence arriving in the second half of next year.
  • The Fed’s slew of monetary easing actions slashed the discounted earnings rate through recent weeks, effectively boosting valuations as anticipated profits outweigh near-term losses, Kolanovic said.
  • The lead quant cited government research suggesting that direct sunlight can kill the coronavirus quickly as a signal that a return to normal activity could accelerate through the summer. However, experts have cautioned against drawing conclusions from the preliminary findings.
  • Visit the Business Insider homepage for more stories.

Federal Reserve policy and summer weather has JPMorgan’s top quantitative analyst feeling more optimistic toward a stock market recovery.

The S&P 500 index is now set to return to record highs in the first half of 2021 as the coronavirus threat fades and business return to regular activity, Marko Kolanovic wrote in a Tuesday note. The firm previously saw a recovery arriving in the second half of next year, but new data on the coronavirus’ spread suggests “the worst-case pandemic scenario will likely not materialise.”

Typical price-earnings ratios lose their effectiveness when shutdowns pull profits to the floor, the head quant said, making a discounted earnings rate the better metric for forecasting the market’s recovery. When the rate falls, future earnings are discounted less and effectively make up for near-term losses.

The Fed’s emergency interest rate cuts and initial monetary aid pushed the discount rate lower in mid-March, but the metric quickly bounced higher as credit spreads widened. The latest wave of central bank stimulus calmed the lending market and pushed the discounting rate 1% below pre-crisis levels, JPMorgan said. Should relief measures hold, the forecasted valuation boom can guide markets to past highs.

“The combined suppression of the risk free rate and credit spreads by the Fed likely has a bigger positive impact on equity valuation, compared with the negative impact of the temporary earnings loss,” Kolanovic wrote.


Read more:
Wall Street’s best-performing fund this year breaks down its long-term strategy that’s outsmarting 99% of peers – and shares 7 stocks to buy for a post-pandemic world

Where the Fed can provide a concrete boost to future valuations, a less predictable variable could become “the most important factor to consider” for reopening the US economy, he added. A Yahoo News report last week described a Department of Homeland Security briefing on preliminary results from a government study finding that sunlight can destroy the coronavirus, though the department cautioned against drawing conclusions from the document, and experts have previously said there is not yet conclusive evidence about whether the virus is killed by sunlight. JPMorgan said that by factoring sunlight-exposure data into its earnings model, it sees the summer as a key period for wiping out the virus and its economic fallout.

A reopening could arrive sooner than expected if workplaces use sunlight to their advantage, Kolanovic said.

“One can think of the virus’ 2-minute life in sunlight as a ‘deep cleaning’ of outdoor spaces every 2 minutes,” he wrote. “Working spaces could be rearranged to allow for maximal natural sunlight, and artificial lightning with equivalent spectral and power output can be installed in high-risk areas.”


Now read more markets coverage from Markets Insider and Business Insider:



A hedge fund manager who dominated the last financial crisis posted a 26% loss during March’s violent sell-offs, new report says



Gold prices will nearly double to a record $US3,000 as central banks fuel ‘financial repression,’ Bank of America says



Meet the 20-year-old day-trading phenom who turned $US20,000 into $US3 million. He details his precise strategy – and shares how he made $US11,400 in 2 minutes this week.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.