The US stock market rally will continue, driven by low interest rates and investors looking for a home for their cash, says JP Morgan Chase.
Most analysts and fund managers including the likes of Mark Cuban, David Tepper, and Jeffrey Gundlach have warned that US stock market valuations are getting expensive. The S&P 500’s forward price to earnings ratio is at a two-decade high.
However, US stock markets have been strong. The Nasdaq Composite is now positive for the year while the S&P 500 is down only about 5.8%.
Last month’s Bank of America’s fund manager survey revealed that fund managers are sitting on a high percentage of cash. Separately, a UBS survey of high net worth individual clients also revealed that wealthy investors have increased their cash holdings expecting markets to fall.
JPMorgan strategist,s led by Nikolaos Panigirtzoglou, said in a note: “Investors are still underweight equities and signs of overextension are confined to momentum traders.”
They added, “There is still plenty of room for investors to raise their equity allocations.” JP Morgan expects the equity allocation of non-bank investors to rise to 49% from the current 40%. Non-bank investors include endowments, households, pensions, and sovereign wealth funds.
John Roe, the head of multi-asset funds at Legal & General Investment Management, started buying stocks as there were not many opportunities on the credit side.
Roe said: “Equities have reached a range where we worry about self-reinforcing momentum.”
He added: “It’s very tough when we are fundamentally negative and think the scarring risks are under-appreciated.”
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