Photographer: Michael Nagle/Bloomberg

Tax Reform to Fuel Rotation to Stocks, JPMorgan's Kolanovic Says

U.S. tax reforms may not have finished boosting stocks yet.

Asset allocators should stay strongly overweight equities and underweight government bonds in the near term due to the uptick in global growth and boost to risk-on assets from U.S. fiscal reform, JPMorgan Chase & Co. strategists led by Marko Kolanovic wrote in a note Friday.

“U.S. corporate tax reform is a significant positive catalyst for equities and it should lead to rotation from bonds to equities,” the strategists said. “Broad and sustained economic growth across regions further reinforces our allocation thesis.”

The Standard & Poor’s 500 Index will rise to 2,914 by the end of 2018, according to the average prediction of strategists tracked by Bloomberg. That would be a gain of 4.6 percent from Friday’s close. JPMorgan’s Dubravko Lakos-Bujas estimates a year-end value of 3,000.

See also: Are You Missing Out on the Great Market Melt-Up?

The active weights recommended by JPMorgan are 12 percent for equities, minus 7 percent for bonds, zero percent each for credit and commodities and minus 5 percent for cash.

Within equities, JPMorgan’s report recommends rotating toward U.S. stocks, and from growth stocks and bond proxies into value and small-capitalization shares. It recommends retaining bearish duration exposure given the improving outlook and gradual shift to less accommodative monetary policy. The strategists also favor U.S. over European credit.

Trades highlighted in the report include:

  • Long U.S. tax outperformers
  • Overweight European equities vs. credit
  • Stay short 2-year U.S. Treasuries and hold 5s/30s curve flatteners
  • Long euro area vs. U.K. equities
  • Increase euro longs on growth: long euro and Swedish Krona vs. U.S. dollar, New Zealand dollar and Japanese yen
  • Financials versus non-financials credit
  • Long Gold volatility as a tail risk hedge
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