Recognizing the likelihood of near term volatility due to the debt imbroglio, JPMorgan Chase & Co (NYSE:JPM) analysts Thomas J Lee, Joseph Abboud and Katherine C Khor nevertheless remain cautiously bullish and project the S&P 500 (INDEXSP:.INX) to scale 1,775 by the end of the year.

U.S. default – probably unlikely…

An interesting viewpoint: Stripped to the essentials the political logjam in Washington is really just a binary event (and risk) – will the U.S. default or not? “In our view, the probability of this is not sufficient to warrant a change to our thesis,” say the analysts.

Hedge funds and mutual funds have reduced beta

In the charts below the authors highlight that hedge funds and mutual funds have adjusted risk levels in order that beta (the tracking difference between the portfolio and S&P 500) is at about the level it was during the last deficit/debt problem in D.C.

JPMorgan hf-beta

JPMorgan mf beta

According to the authors, downside risk stands mitigated.

Earnings – Here and across the pond

Encouraging economic performance in the U.S. as well as in Europe should boost Q3 earnings and this could play out positively for equities in the coming weeks. The analysts expect EPS to grow in the high single digit range, and say this could possibly be the best quarter since Q1 of 2012.

Better performance in the housing and auto sectors, as well as improving metrics in industrial production call for better expectations for the S&P 500 EPS over the next 12 months, as per the chart below. By end 2014, the S&P 500 (INDEXSP:.INX) EPS could be 25% higher than the 2007 top, yet equities are only 8% above the 2007 high, implying that a lot of the EPS gains remain to be priced in.

JPMorgan sp500-projected

JPMorgan’s stock selection

In the current environment the analysts recommend 15 stocks that are expected to outperform due to their inherent ‘style’ factors such as ‘pure growth’, ‘low short interest’ and ‘most popular’, as well as for Overweight ratings by JPMorgan Chase & Co (NYSE:JPM):

Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), American Tower Corp (NYSE:AMT), Zoetis Inc (NYSE:ZTS), Agilent Technologies Inc. (NYSE:A), Google Inc (NASDAQ:GOOG), Mastercard Inc (NYSE:MA), DLPH, The Boeing Company (NYSE:BA), Time Warner Inc (NYSE:TWX), The Home Depot, Inc. (NYSE:HD), Comcast Corporation (NASDAQ:CMCSA), Noble Energy, Inc. (NYSE:NBL), eBay Inc (NASDAQ:EBAY) and Apple Inc. (NASDAQ:AAPL).