The huge rotation taking place in the stock market isn’t even halfway over, JP Morgan says

Traders work on the floor at the New York Stock Exchange, December 9, 2019.

Brendan McDermid | Reuters

The “once in a decade” trade J.P. Morgan called four months ago is still alive and has more room to run.

The massive rotation into value stocks and out of momentum names that began in September is not even halfway done, according to J.P. Morgan’s chief U.S. equity strategist Dubravko Lakos-Bujas. The analyst said the trend will persist as the economy reaccelerates, aided by central bank easing.

“Currently, we estimate that 42% of potential rotation has been realized,” Lakos-Bujas said in a note on Thursday. “As data prints improve, the reacceleration of the business cycle will be more evident and should lead to greater risk appetite.”

Value stocks staged a big comeback in September after years of underperformance as investors bet on economically sensitive, cheap stocks on hopes for a U.S.-China trade deal and a rebound in economic conditions.

Value names have been outperforming momentum stocks over the past few months. The iShares Edge MSCI USA Value Factor ETF, one of the biggest exchange-traded funds focused on value factor, surged nearly 10% in the past six months, while the iShares Edge MSCI USA Momentum Factor ETF was up 6% during the same period.

Despite the recent rally, value stocks still remain oversold and “very cheap” compared to history, Lakos-Bujas pointed out.

Investors will continue to gravitate towards value and cyclical stocks on the back of an easier monetary policy, the analyst said. The Federal Reserve reversed course last year, cutting interest rates three times and started expanding its balance sheet.

“Global cyclical upturn has legs and is not fragile as feared by many,” Lakos-Bujas said. “The change in trajectory of global monetary policy and central bank balance sheet growth will be a powerful driver of a new intra-cycle recovery.”

J.P. Morgan set its year-end target for the S&P 500 at 3,400, about 3% gain from here.

The biggest holdings in the iShares Edge MSCI USA Value Factor ETF include Berkshire Hathaway, Exxon Mobil, UnitedHealth, Bank of America and AT&T.

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