JP Morgan has warned the sell-off in equities on fears the Federal Reserve could hike rates and a poor earnings season has been “overdone” despite ETF investors continuing to rotate out of growth stocks.

In a note to clients, Marko Kolanovic, head of quantitative research at the bank, said the recent bearishness was not in line with activity momentum, easing bottlenecks and the prospect of a strong earnings season.

The warning came as the S&P 500 edged towards correction territory on Monday 24 January before a late rally as markets struggle to digest the rotation forced on it by rising rates.

However, stocks plunged again on Tuesday taking the S&P 500 into a correction with losses of 10% for the year while the Nasdaq is down almost 15% year to date.

“Market worries around rates and corporate margins are overdone,” he wrote. “The recent pullback in risk assets appears overdone, and a combination of technical indicators approaching oversold territory and sentiment turning bearish suggest we could be in the final stages of this correction.

“While the market struggles to digest the rotation forced on it by rising rates, we expect the earnings season to reassure.”

While some are concerned about rising input prices, he added the bank expects company margins to remain resilient thanks to strong activity and prices outpacing wage inflation.

“Despite fears by many over rising input cost pressure, profit margins have been very strong through last year, reaching fresh highs in the US and Europe,” Kolanovic said. 

Elsewhere, the bank added it had turned bullish on Asia equities with China expected to become more growth supportive in 2022 and forecast a 10% upside in MSCI Asia ex-Japan and MSCI Asia Pacific.

Investors shun growth ETFs

Investors continued their rotation into value ETFs last week with several growth-heavy ETFs experiencing outflows.

The iShares NASDAQ 100 UCITS ETF (CNDX) recorded $165m outflows in the week ending 21 January while the Amundi S&P 500 UCITS ETF (500E) posted outflows of $193m, according to data from Ultumus.

Also experiencing a loss of assets was the Lyxor S&P 500 UCITS ETF (SP5) and the iShares S&P 500 Information Technology Sector UCITS ETF (IUIT) which saw outflows of $64m and $59m, respectively.

The flight to value picked up speed with the $3.6bn iShares Edge MSCI USA Value Factor UCITS ETF (IUVL) recording $145m inflows last week while the iShares Edge MSCI Europe Value Factor UCITS ETF (IEVL) saw inflows of $161m.

The Xtrackers MSCI World Value UCITS ETF (XDEV) and the Xtrackers S&P 500 Equal Weight UCITS ETF (XDEX) saw inflows of $139m and $213, respectively.

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