Post-midterm geopolitical risks could create another buying opportunity: JPM

 JPMorgan believes the risk of renewed geopolitical escalation after the U.S. midterm elections is elevated, but any resulting market weakness would likely be another buying opportunity.

Strategist Mislav Matejka told clients in a note on Monday that a restart of the U.S.-Iran conflict could trigger market weakness and a fresh spike in oil prices.

“If the re-start of the conflict does come through, we do not think it will be prolonged, it will likely end up as another dip to buy, like all geopolitics driven dips we saw since March,” Matejka wrote.

He noted that equities have been resilient, with the MSCI World up 12% year to date and the S&P 500 just 3% off its record high. 

However, last month’s sharp rotation into defensive sectors erased the gains that higher-beta sectors made over the prior three months.

JPMorgan maintains its view that bond yields peaked in early October. It said third-quarter EPS growth remains strong, global PMIs are holding near highs, and P/E multiples have derated, with the U.S. now at 19 times forward earnings, down from 23 times.

Matejka added that equity sentiment has likely become overly bearish and seasonal patterns are improving.

“If one joins selling during these derisking episodes, one risks being whipsawed on any favourable headline,” he said.

JPMorgan expects a recovery in banks, industrials, commodities and semiconductors, while defensives should stall again. It is positive on emerging markets and sees the U.K. as a good place to hide during risk-off episodes. The bank also sees gold’s pullback as an opportunity to add.

“We believe SPX will make fresh highs into year-end, on continued earnings uptrend and the stabilization in Tech trade,” the strategist said.