The $100 billion catalyst

Technical indicators could play a critical role in the potential turnaround.

Kolanovic points out that the S&P 500 “is on the cusp of breaking important momentum signals” such as the 200-day moving average.

On stock charts, the 200-day moving average is shown as a line. Traders can use this line to determine whether the trend is up or down and identify potential support or resistance areas.

The S&P 500 has largely traded below its 200-day moving average in recent months. Kolanovic suggests that if the index can break above this 200-day moving average, it could lead to inflows “on the order of ~$100 billion.”

We may have to wait a bit for that to happen. The S&P 500 fell 1.3% on Friday and then tumbled another 2.1% on Monday.

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Will the Fed pivot?

To tame spiking inflation, the Fed is raising interest rates aggressively, and that has cast a giant shadow over the stock market.

But Kolanovic doesn’t believe the central bank’s hawkish stance would persist.

“[W]e are again out of consensus and maintain that inflation will resolve on its own as distortions fade and that the Fed has overreacted with 75 bps hike,” he writes. “This Fed ‘overreaction’ and subsequent but largely unrelated decline in inflation will probably result in a Fed pivot, which is positive for cyclical assets.”

Opportunities ahead

While JPMorgan has a bullish price target for the S&P 500, it does not suggest simply buying the benchmark index as a whole.

Kolanovic also cautions not to chase large-cap tech stocks or recession-proof stocks that are already “trading near all-time highs.”

The opportunities he sees are valuation-based.

“There are market segments such as energy trading at mid-single digit P/Es (below recession multiples), and even some broad markets such as the S&P 600 small cap index trading at recession level multiples,” he writes.

Investors can use ETFs to get exposure to these segments. For instance, the Energy Select Sector SPDR Fund (XLE) provides investors with convenient access to the energy sector of the S&P 500. Meanwhile, investors can use funds like the Vanguard S&P Small-Cap 600 ETF (VIOO) and the SPDR Portfolio S&P 600 Small Cap ETF (SPSM) to track the small-cap index.

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