The stock market's sell-off is in its 'final stages' and investors' fears of rate hikes and weak earnings are overdone, JPMorgan's quant guru says

• The 10% sell-off in the S&P 500 is in its "final stages," according to JPMorgan's Marko Kolanovic.
• He believes fears over rising interest rates are overdone, and highlights that sentiment has flipped to bearish.
• Bearish sentiment and oversold technicals "suggest we could be in the final stages of this correction," Kolanovic said.
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The correction in the S&P 500 could be approaching its "final stages" as fears of rising interest rates are overdone, according to JPMorgan's Marko Kolanovic.

The S&P 500 has fallen as much as 10% from its record high, while the tech-heavy Nasdaq 100 was down more than 15%. Much of the sell-off has been attributed to a hawkish Fed that is planning to raise interest rates to combat rising inflation.

But in a Monday note, Kolanovic said the recent bearishness in stocks is out of line with momentum in economic activity, easing supply chain bottlenecks, and "what we expect to be a strong earnings season," according to the note.

"While some are concerned that rising input prices will eat into margins, we expect margins to remain resilient thanks to strong activity and prices outpacing wage inflation," Kolanovic explained.

A bearish turn in investor sentiment and oversold technical indicators suggest "we could be in the final stages of this correction. While the market struggles to digest the rotation forced on it by raising rates, we expect the earnings season to reassure," Kolanovic said.

Investor sentiment plunged to a 10-year low last week, according to AAII's weekly survey, while CNN's Fear and Greed Index was in "fear" territory on Monday. For contrarian investors, that bearish sentiment flashes a buy signal for stocks.

And in the event that the stock market continues to sell off, Kolanovic sees the Fed potentially stepping in with policy changes to stem the decline. "In a worst case scenario could see a return of the 'Fed put,'" Kolanovic said.

A change for the Fed after a steep market correction could mean fewer interest rate hikes this year or a delay in its plans to reduce its balance sheet. That in turn would likely help fuel the return of investors' risk appetite and spark a rally in beaten-down tech stocks and cryptocurrencies. But this all likely hinges on the pace of inflation.

"Our expectation for a gradual hiking cycle also relies on our economists' view that year-over-year headline inflation moderates to 2.9% by the fourth quarter of 2022, which should take the temperature down," Kolanovic said.