Stocks are due for a correction, but investors should buy the dip as a major crash is unlikely in 2021, Jefferies says

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Stocks are due for a correction, but investors should buy the dip as a major crash is unlikely in 2021, Jefferies says
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Stocks may be due for a correction, but the market is unlikely to see a "prolonged unwinding," and investors should buy any dips, according to a note from Jefferies' Desh Peramunetilleke.

While some on Wall Street are warning that the stock market is in a bubble about to burst, Peramunetilleke said the bubble won't pop just yet, and 2021 will be "at best a flat year" for stocks.

The equity analyst listed an "earnings collapse" and potential monetary tightening as two factors that would pop the market bubble. But as of right now, the risk of those factors materializing is low, he said.

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Based on the 59% of companies that have reported earnings, the S&P 500 is currently seeing earnings growth of 1.7%, up from a decline of 2.4% the prior week. According to Nuveen's Saira Malik, should this trend continue, it will be the first time earnings experience year-over-year growth since the fourth quarter of 2019.

An unexpected interest rate hike could trigger a bursting of the bubble, though Peramunetilleke said that's unlikely to occur soon. Other potential risks to the market include a "total relapse" of COVID-19, immediate US tax hikes, "crippling tech regulations," and an escalation of the US-China tech war. However, the analyst said the probability of all these events is low enough that he is comfortable buying any dip in the market.

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"Hence, we see the current markets as frothy that are due for a correction, but are unlikely to witness a prolonged unwinding. We are in the buy-the-dip camp," Peramunetilleke said.

"There is also a risk that a retail unwinding could severely disrupt the overall system stability, though we are confident that central banks will limit the impact of such an event," he added.

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