“The past week’s sell-off appears overdone, and driven to a large extent by technical flows, fear, and poor market liquidity, rather than fundamental developments,” said Marko Kolanovic, JPMorgan’s top strategist.
“While we expect growth to soften, we continue to push back on a base case assumption that the global economy is headed for recession, an outcome that is increasingly being priced by markets,” he added.
The firm pointed to several factors supporting its case that the world is not heading toward a recession, including economies reopening after Covid, strong labor markets and healthy corporate balance sheets.
Energy stocks remain the firm’s highest conviction overweight, despite the sector’s outperformance in 2022 and over the last year.
JPMorgan forecasts energy demand exceeding supply by 20% over the long run, requiring $1.3 trillion in capital spending to close the gap by 2030.
Valuations are also not reflecting the surge in oil prices, the firm said.
“Energy stocks are far from pricing in strong and sustainable outlooks,” Kolanovic wrote in a note to clients, adding that energy is only about 4% of the total S&P 500 and is the cheapest sector across all valuation metrics.
“For a sector that is a direct input into every segment of the economy and a natural hedge against geopolitics and inflation, in our view Energy’s earnings stream is worth more than the current P/E of 9.5x,” the firm said.
The energy sector was down roughly 8% around 2:20 p.m. on Wall Street, making it the worst-performing S&P sector by a longshot. However, the group is coming off a 10% gain from the prior week. It’s also the top sector for 2022, rising about 37%.
Some of Monday’s worst performers were Occidental, EOG, Devon, APA and Marathon Oil, all of which tanked by more than 10%.