The bull market in stocks is unlikely to be derailed by the Federal Reserve's expected interest rate hikes, JPMorgan quant guru says

• The Federal Reserve's upcoming interest rate hikes won't end the bull market in stocks, according to JPMorgan.
• The bank views the recent market sell-off as overdone and views it as an opportunity to buy stocks.
• "While jitters around a Fed hiking cycle are understandable, this has been magnified by technical factors that can change quickly," JPMorgan's Kolanovic said.
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Expected interest rate hikes from the Federal Reserve later this year won't end the bull market in stocks, according to JPMorgan quant guru Marko Kolanovic.

In a Monday note, he reiterated his call for investors to take advantage of the recent market sell-off and buy stocks, arguing that the near-10% decline in the S&P 500 was overdone.

"Stocks are in bear market territory and erased their post-pandemic re-rating, small cap valuations are at 20-year lows, and investor sentiment is bearish," Kolanovic explained, adding that technical factors likely magnified the drawdown seen in stocks after the Fed's hawkish pivot late last year.

"While jitters around a Fed hiking cycle are understandable, this has been magnified by technical factors that can change quickly," he said. A reversal in systematic outflows and a pickup in corporate stock buyback activity as blackout windows end are helping to speed up the potential rebound in stocks to new heights.

Investors are expecting at least four interest rate hikes from the Fed this year, as the central bank seeks to tame rising inflation. While JPMorgan expects up to five interest rate hikes, some firms like Bank of America expect as many as seven.

But the big risk to such forecasts is that inflation starts to cool, which would give the Fed breathing room in terms of spacing out its interest rate hikes, according to Kolanovic. That would represent an upside risk for stocks. 

Additionally, despite a more than 20% decline in small cap stocks, there is no recession in sight, he said. Such a steep sell-off in small caps has often predicated an economic recession, but not this time, according to the note.

Kolanovic's confidence that stocks can go higher even as the Fed raises interest rates is predicated on the fact that the economy is still in growth mode and corporate earnings are on pace to continue their growth-spree, "which should allow the equity market to easily outperform cash and fixed income over the coming years, even if one assumes some gradual de-rating."

Going forward, he favors emerging market and international stocks relative to US stocks, due to interest rate sensitivity, attractive valuations, and favorable investor positioning, the note said. High commodity prices also serve as a tailwind for emerging market equities. 

"Yes, the Fed is in tightening mode, but the majority of times emerging market equities outperformed developed markets while the Fed was raising rates," Kolanovic said.