J.P.Morgan, Morgan Stanley see dip-buying chance as earnings hold up

• S&P 500 Q1 2026 earnings growth estimated at 13.9% as of April 10, up from 12.7% before the conflict, suggesting corporate fundamentals remain intact despite geopolitical volatility
• The 'Magnificent Seven' valuation premium has compressed sharply, with forward P/E ratio falling to 1.2x the S&P 500 from 1.7x previously, signaling potential sector rotation opportunities
• Morgan Stanley favors cyclical sectors (financials, industrials, consumer discretionary) and quality growth names like AI hyperscalers, while J.P. Morgan prefers international equities over US markets

Summary

Key Developments:

J.P. Morgan and Morgan Stanley view the recent market decline driven by Middle East tensions as a buying opportunity, citing strong corporate earnings and attractive valuations. The S&P 500 rebounded nearly 8% from a seven-month low in March but remains cautious as US-Iran talks failed to produce results.

Market Performance:

• S&P 500 down 8% since US-Israel-Iran conflict began, narrowly avoiding the 10% correction threshold
• US equities outperformed Europe's STOXX 600 (down 11%) and MSCI Emerging Markets (entered correction territory)
• Earnings growth for S&P 500 Q1 2026 estimated at 13.9% (April 10), up from 12.7% pre-conflict

Strategic Outlook:

Morgan Stanley characterizes the selloff as a correction rather than a sustained bear market. The firm favors cyclical sectors—financials, industrials, and consumer discretionary—plus quality growth stocks including AI hyperscalers, due to intact earnings momentum.

Valuation Shift:

The "Magnificent Seven" forward P/E premium compressed to 1.2x the S&P 500 from 1.7x previously, suggesting potential sector rotation as investors seek more attractive pricing.

Investment Positioning:

Despite a constructive equity view, Morgan Stanley downgraded global equities in late March due to near-term risks. J.P. Morgan favors international equities over US markets while maintaining that geopolitical-driven dips should prove temporary buying opportunities.

Market Implications:

Analysts believe geopolitical escalation is unlikely to be sustained indefinitely. The combination of resilient earnings growth and improved valuations provides downside protection, though near-term volatility remains elevated pending Middle East developments.