JPMorgan strategist Nikolaos Panigirtzoglou recently stated in a note to clients that his team has updated their stock prediction model. The model now suggests a higher likelihood of a stock market rally in the second half of the year. You can now listen to this analysis in audio format via the AI Podcast.
The model uses six signals to predict the direction of the S&P 500 over the next six months. These signals are:
The latest readings from the model suggest a high confidence in a stock market rally. "The 96% probability currently is well above the 75% threshold, implying a low probability of an S&P 500 decline over the next six months based on the model inputs," Panigirtzoglou wrote.
Flows were the most supportive signal for a stock market rally, according to the model. However, the report reveals an interesting paradox: despite outflows from equity funds and inflows to bond funds over the past four weeks, the S&P 500 is nearing all-time highs. This suggests that other factors, such as corporate buybacks, may be supporting the market.
The report also indicates that retail investors are not "fully loaded" on stocks. "Retail investor interest in equities was very low in May, improved in June, but still modest relative to recent history," Panigirtzoglou wrote. This suggests there is room for increased participation from retail investors in the future.
Interestingly, the JPMorgan model, based on relatively simple logistic regression, has outperformed more complex AI models in predicting market movements, particularly when forecasting downturns. This highlights the importance of understanding the fundamental drivers of the market, rather than solely relying on complex algorithms.
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