Stocks are recovering but may be about to reach their "cap," says JP Morgan

Inventories soared in early 2019, but the rally could lose momentum as the S & P 500 approaches a near-term high, according to JP Morgan.

Earnings growth forecasts have declined as the potential economic slowdown, coupled with a protracted trade dispute between China and the United States, could hurt corporate earnings.

Recently, the gap between the 10-year Treasury bond and its 3-month counterpart has become negative, creating a reversal of the yield curve. Investors see this as a sign that a recession may be looming on the horizon. At the same time, trade negotiations between China and the United States continue.

However, worries about the economy have led the Federal Reserve to adopt a more accommodative monetary policy starting in 2019, which should have a stimulating effect on equities. On the trade side, both sides said progress was being made on key issues such as forced technology transfers.

Economic data also improves. Manufacturing activity in China reached its highest level in March in eight months. In the United States, it rebounded from its lowest level since November 2016.

The 10-year benchmark yield was 2.47% after the release of the data, compared to about 2.41% in the previous session.

"If investors regain some of the economic optimism of January and February about overall growth [calendar first quarter] and continue in [calendar second quarter] … This will be extremely beneficial for short-term stocks and should drastically undermine the bond rally, "Crisafulli said. If the bonds show a sustained sale, this will support the financial actions (and more generally the cyclical ones) in the days and weeks to come. . "

Crisafulli also said that while the consensus on S & P 500 earnings in 2020 would be around $ 185 per share, the broader index could reach a record high of 3,145.

However, an "irresponsible" Fed – which means the Fed should not return to a neutral or hawkish political bias if global economic risks diminish and growth improves – – the multiple of gains should also be of the index moves to 17 current level of 16, he said.

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