JP Morgan recommends clients add further to equity positions

Equity strategists at JP Morgan recommended clients use the consolidation to "add further" to their positions in stocks, arguing that investor positioning was "light" and that companies' profit margins were set to improve.

"At the market level, we argued in our March Chartbook that in the short term stocks are susceptible to some consolidation into the Q1 results, as many tactical indicators started to appear toppy. However, we do not think that the weakness needs to last long, or be very material, as positioning is still light," JP Morgan's Mislav Matejka said in a research report sent to clients.

His recommendation was to be 'long' Technology and Commodities, although he remained unenthused by lenders's shares.

On margins, he disagreed with the consensus view that they must be headed lower given how old the cycle was and rising input costs.

For starters, Matejka said, commodity prices tended to track margins.

As well, the link between higher wages and profit margins was not as straightforward as it might seem, he added.

Indeed, when unemployment fell, margins rise and JP Morgan's economists expected joblessness to continue declining for "at least" the next seven to eight quarters.

What did matter was companies' operating leverage.

"Looking at the '15-'16 mid cycle correction episode, margins cyclically fell, but rebounded as growth stabilised. The same might follow again, with stronger profits and margins into the end of this year."