JP Morgan raises its stock market forecast, sees a China trade deal and an easy Fed

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The Charging Bull near Wall Street is pictured in New York, January 16, 2019

Carlo Allegri | Reuters

J.P. Morgan on Monday raised its 12-month S&P 500 forecast and told clients that the market is set for even more gains in the second half as the Federal Reserve pivots toward easier monetary policy and the Trump administration looks to end an entrenched trade dispute with China.

The brokerage raised its S&P 500 price target to 3,200 from 3,000, representing 6.2% upside from Friday’s close. The S&P 500 notched an all-time and closing high on Friday, finishing the session at 3,013.77.

We are “raising our S&P 500 12-month price target to 3,200 as our upside case for equities is increasingly in play with Fed and Trump easing on policy while investor positioning/sentiment remains low,” chief U.S. equity strategist Dubravko Lakos-Bujas wrote in a note.

Central to J.P Morgan’s renewed optimism around stocks is what the brokerage believes is the increasing likelihood that central banks around the world will relax monetary policy in the second half of the year.

Six developed market and 13 emerging market central banks are expected to ease their policies before the end of the year, Lakos-Bujas added, suggesting lowering borrowing costs for corporations.

The higher S&P 500 target also assumes a partial trade deal between Washington and Beijing before year’s end. Both the U.S. and China have slapped tariffs on billions of dollars’ worth of imports as the two sides work to end a protracted trade dispute.

The bilateral spat took a turn for the worse in May, when President Donald Trump threatened and followed through on threats to ramp up U.S. tariffs on Chinese imports, catching investors by surprise and sending equities tumbling. Those hostilities appeared to ease after Trump and China President Xi Jinping met at a Group of 20 summit in Japan.

The brokerage also recommended different styles and sectors for investors in the second half of the year, saying that value stocks could make for good bets.

As of June 30, Lakos-Bujas and J.P. Morgan advised investors avoid low volume stocks and look for cheaper deals in companies with strong dividends, fundamentals and earnings potential. Among the top picks were CVS Health, Hewlett Packard, Macy’s, United Airlines and Ford

“The more cyclical and trade-sensitive stocks will likely see a higher degree of negative revisions to forward guidance. However, these stocks are not that vulnerable given most trade at a significant discount to the market with some pricing in a recession,” the strategist wrote.

“In our view, the larger downside risk lies in high momentum/quality/defensive stocks if they were to disappoint given crowding and rich multiples,” he added.

The new J.P. Morgan target represents one of the most bullish market projections published by a major brokerage, though most of the strategists tracked by CNBC issue year-end targets instead of 12-month outlooks, which could impact how much strategists expect the markets to move.

The median target tracked by CNBC is 2,950, while Deutsche Bank’s Binky Chadha remains the most bullish of the group with a target of 3,250.

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