Inflation will work itself out and help drive the stock market higher as the Fed leans into a pivot, JPMorgan says

  • Inflation is going to work itself out as distortions from the pandemic fade, according to JPMorgan’s Marko Kolanovic.
  • The bank said that as inflation recedes it should help drive the stock market higher.
  • “The Fed has over-reacted with 75bps hike. We will likely see a Fed pivot,” Kolanovic said.

Inflation is going to work itself out and ultimately drive the stock market higher as oil prices fall and supply chain bottlenecks resolve, JPMorgan’s Marko Kolanovic said in a Monday note.

Inflation has been running hot over the past year and has been top of mind for both investors and the Federal Reserve. The four-decade highs in US inflation readings have led to back-to-back-to-back outsized interest rate hikes this year in a bid to tame rising prices.

But Kolanovic is concerned about Fed Chair Jerome Powell over-reacting with another 75-basis-point rate hike next month, and said that the Fed should ultimately pivot away from such outsized rate hikes. Current market expectations suggest the Fed will once again raise interest rates by 75 basis points at its September FOMC meeting.

“We maintain that inflation will resolve on its own as distortions fade and that the Fed has over-reacted with 75 basis point hike[s]. We will likely see a Fed pivot, which is positive for cyclical assets,” Kolanovic said.

That, combined with a second half recovery from China, no global recession, and very bearish positioning among systematic and discretionary investment funds gives Kolanovic confidence in his year-end S&P 500 target of 4,800. A surge to those levels represents 16% upside potential from current levels.

And the Fed has little incentive to effect big interest rate hikes right before the US midterm elections, Kolanovic added.

“Given the lag it takes for rate hikes to work through the system and with just one month before very important US elections, we believe it would be a mistake for the Fed to increase risk of a hawkish policy error and endanger market stability,” Kolanovic explained.

A Fed that doesn’t make a policy mistake means that a soft economic landing is very much in the cards for the US, though JPMorgan sees little potential for that happening in Europe as energy prices soar and inflation remains elevated.

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