The stock market is poised for more upside following July's rally after valuations see their 2nd-biggest decline in 30 years, JPMorgan says

• The stock market is poised for more upside in the back half of this year, according to JPMorgan.
• The bank believes investor expectations have been reset, which is a positive for future returns.
• "Although the activity outlook remains challenging, we believe that the risk-reward for equities is looking more attractive."

The stock market is poised to extend its July rally of nearly 10% and continue higher in the back half of the year, according to JPMorgan's Marko Kolanovic.

That's because the peak-to-trough decline of more than 20% in the S&P 500 this year reset investor expectations enough to skew the current risk-reward profile in the bulls favor, according to Kolanovic. 

"Although the activity outlook remains challenging, we believe that the risk-reward for equities is looking more attractive as we move through 2H," Kolanovic said.

Kolanovic highlighted that the bear market decline in stocks this year represented the second-biggest decline in S&P 500 valuations in 30-years, "exceeding the typical compression seen during prior recessions." The S&P 500 saw its price-to-earnings ratio de-rate by 6.7x, compared to an average compression of 4.5x during prior recessions.

In other words, the decline in stocks was overdone if you believe the economy is on solid footing and not in a recession.

Helping boost risk assets going forward, according to the note, is Fed Chairman Jerome Powell's recent dovish tone regarding interest rate hikes, along with the potential that inflation has peaked. 

"Last week's more dovish Fed meeting that saw the base rate raised close to neutral, along with softening inflation expectations and declining bond yields, indicate peak hawkishness is likely behind. Risk markets are rallying despite some disappointing data releases, indicating bad news was already anticipated," Kolanovic said.

Ultimately, Kolanovic remains steadfast in his view that the US economy will avoid a recession despite two straight quarters of negative GDP growth. Kolanovic expects a rebound in GDP growth to 1% in the second half of the year.

"There are some encouraging details in the disappointing GDP report as firms sharply slowed their pace of stockbuilding, and real consumption eked out a gain in June as households continue to cushion inflation shocks with a lower savings rate," Kolanovic said. 

JPMorgan has a year-end price target of 4,800 for the S&P 500, representing potential upside of 17% from current levels.