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Why JPMorgan thinks there's still plenty of room for the bull market to run

Stocks continue to surf a wave of all-time highs, and the conversation of “is the market too hot and ripe for a correction?” has been only getting louder.

Some of those questions will be answered by this earnings season, but JPMorgan analysts have other reasons to think the optimism reflected in the market’s high prices isn’t just warranted but could go even higher.

In a note to clients, analysts from the bank’s global markets strategy team wrote that its “most holistic metric” of how non-bank investors are currently invested in stocks shows allocations that may surprise some as relatively conservative.

The positioning metrics show investors’ portfolios have a stock share of 43.8%. Here’s the important context: This is above the 42.3% average since the 2008-09 Financial Crisis, which the analysts called “the post-Lehman” average. They use it as a benchmark for a neutral level of equity allocation.

Average levels of equity asset allocation in non-bank portfolios. (JPM)
Average levels of equity asset allocation in non-bank portfolios. (JPM)

The market passed that threshold in November, and in that context, the market might seem overly hot, and perhaps ripe for a correction as investors de-risk.

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"Luckily," the analysts wrote, "the implied equity allocation is still significantly below the post-Lehman period high of 47.6% recorded in January 2018, so [equities have] more room, in our opinion.”

How much room exactly is an unrealistic figure to give with any real confidence, but the JPMorgan team has a framework for one scenario, based on those positioning levels. If investors are at 43.8% stocks now, the analysts see a potential upside with the 47.6% level as a high-water mark. If that were reached, that would mean the S&P 500 would go up by 26.1%.

“This equity upside calculation exhibits little sensitivity to a potential rise in bond yields and is more sensitive to our projection of money supply expansion,” the analysts wrote.

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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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