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Economy & Markets

Investing in a changed world of shortages and oversupply

Jul 18, 2023

To make sense of elevated interest rates, rolling recessions, supply issues and a tech revolution, you may need to apply a new investing framework.

Whither the U.S. economy?

So far in 2023, it hasn’t entered a recession and what’s more, the old “recession template” for investing—selling stocks to buy bonds and hold more cash—hasn’t been especially helpful. It’s easy to see why: GDP growth (not adjusted for inflation) has stabilized at 7.0%–7.5%. Meanwhile, operating profit margins for S&P 500 companies have stabilized, too, on average, modestly above their pre-pandemic levels (chart below).

These are not recessionary dynamics—they are more consistent with an economy running a bit too hot.1 No wonder risk assets have performed well year to date (YTD). The S&P 500 Index is up by more than 15% and high yield bond spreads have narrowed as of mid-July 2023.2 Here is what we see emerging: Beneath the surface of broad market metrics, some industry sectors are weakening while other sectors are experiencing strong demand amid shortages. Equity strategists have a term for this phenomenon: “rolling sector recessions.” Typically, these occur beneath the surface of broad markets, which is consistent with the patterns we identify and assess below.

Nominal U.S. GDP growth and corporate profit margins remain resilient

Sources: Haver Analytics, National Bureau of Economic Research, Standard & Poor’s, U.S. Bureau of Economic Analysis. Data as of May 31, 2023.
The chart describes the S&P 500 operating margin (%) versus nominal GDP growth (% Change year-over-year) from 1992 to 2023. The S&P 500 operating margin line started at 3.458% on March 31, 1992. It line trended upward until it reached a high point at 6.37% on September 30, 2000. Then it went down and reached a bottom at 4.932% on June 30, 2001. It then went up until it reached another peak at 9.48% on December 31, 2006. Later it went all the way down until it bottomed at 0.738% on December 31, 2008. Then it went up again until it reached a high point at 11.621% on September 30, 2018. It then went down briefly before it jumped back up to the highest level at 13.856% on December 31, 2021. The last data point came in at 11.606% on March 31, 2023. The nominal GDP growth line came in at 5.38% on March 31, 1992. It went up and down before it reached a low level at 2.11% on December 31, 2001. It then went up briefly before going back down to an even lower level at -3.7% on March 31, 2009. Quickly after, it went up and stabilized until it reached a high level at 5.95% on March 31, 2018. Then it went down drastically to bottom out at -7.88% on June 30, 2020. Then soon it went up all the way and peaked at 17.33% on June 30, 2021. The last data point came in at 7.83% on March 31, 2023. The are also shaded bars in the chart that represent the time of recession. The first shaded bar started on April 30, 2001, and continued until October 31, 2001. The second shaded bar started on January 31, 2008, and continued until May 31, 2009. The third shaded bar started on March 31, 2020, and ended quickly on April 30, 2020.
The full extent of these sector divergences can be seen in the chart below, which plots YTD stock market performance as of June 2023 for four key sectors: housing (up 37%), autos (up 78%),3 regional banks (down 26%), and the office sector of commercial real estate (down 17%).

Striking performance disparities are emerging across key industry sectors

Source:Bloomberg Finance L.P. Data as of June 23, 2023. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
The chart describes sector divergences (cumulative YTD returns in 2023) for four different sectors (Homebuilding, Auto and auto components, Regional banks, REIT office property). For the homebuilding sector line, it started at 0% in January 2023. The line trended up until the end where the last data point came in at 39.9% on June 23, 2023. For the auto and auto components sector line, it started at 0% in January 2023. It went up to reach a high at 55.59% on February 15, 2023. Then it came down to 17.09% on April 26, 2023. Later it climbed to a high level at 84.2% on June 20, 2023. The last data point came in at 73.88% on June 23, 2023. For the regional banks sector line, it started at 0% in January 2023. It peaked at 12.53% on February 2, 2023. It then went down and bottomed at -37.19% on May 4, 2023. It then stabilized and the last data point came in at -30.54% on June 23, 2023. For the REIT office property sector line, it started at 0% in January 2023. It peaked at 15.78% on February 2, 2023. It then went down, and the last data point ended low at -22.48% on June 23, 2023.

Navigating industry-specific rolling recessions as an investor in a macro economy that keeps growing robustly in nominal terms (excluding inflation) requires a careful and nuanced analysis.

Our aim is to provide a framework for understanding these stark sectoral differences and—in the final section—explore how artificial intelligence (AI) fits in, as it begins to impact the real economy and drive corporate earnings. No one yet knows exactly how this technological revolution will play out, but the trend lines are becoming clear: AI-related stocks are up 37% YTD as of July 2023.4

What market forces are at work in the sectors being hit by shortages and oversupply—and more importantly, how can a concept of comparative shortages and excesses help inform portfolio strategy? Let’s examine the fundamental drivers affecting U.S. housing, autos, regional banks and commercial real estate (specifically, offices).

Their differences are more obvious than their similarities, but housing and autos are linked because these two sectors are still operating in a state of shortage: Their current inventory levels are insufficient to meet strong demand. Conversely, regional banks and office buildings can be characterized as struggling with an excess of supply.

Supply shortage: Housing

We recently estimated the United States has a shortage of 2 million to 2.5 million housing units relative to population pressures. We reached this number by examining housing starts and completions relative to trend household formation growth (and also accounting for obsolescence).5

This shortage has sharply lifted the value of new-build housing supply, especially with high mortgage rates deterring existing homeowners from selling. The current market rate for a 30-year fixed mortgage is just under 7%, which is significantly higher than the average mortgage rate of 3.5% that U.S. homeowners currently have locked in across the economy. For these reasons, new home sales continue to make up a higher fraction of sales than in the 2010s.

New home sales in the United States currently account for a high percentage of total sales

Source: Haver Analytics, National Association of Realtors, U.S. Census Bureau. Data as of May 31, 2023.
The chart describes new home sales as share of new + existing home sales from 1995 to 2023. The first data point came in at 15.784% in January 1995. It stayed relatively flat until it peaked at 18.584% in July 2005. Then it fell all the way until it bottomed out at 6.061% on in May 2010. Then it trended up until it peaked at 17.508% in June 2020. The last data point came in at 16.54% in May 2023.
The U.S. housing stock is also aging fast. Significant underbuilding following the 2008–2009 global financial crisis (GFC) raised the average age of U.S. homes by more than 20%. That metric is now approaching levels that persisted during World War 2, when war rationing significantly delayed housing construction. Once the war ended, however, housing construction boomed; the average age of the U.S. housing stock then fell precipitously through the 1950s and 1960s.

The age of existing U.S. housing stock is historically high—and getting older

Source: Haver Analytics, U.S. Bureau of Economic Analysis. Data as of December 31, 2021.
The chart describes the average age of the U.S. housing stock (as in years) from 1925 to 2021. The first data point came in at 24 in 1925. It went up all the way until it reached the highest level at 33 in 1945. Then it went all the way down and bottomed out at 24.3 in 1973. Later it trended up and ended high at 31.3 in 2021.

None of these market factors suggest that we will see a comparable 1950s-style housing construction boom, but the general direction remains the same. The only way to address the current housing shortage—and reduce the age of the U.S. housing stock—is to permit more construction. We see evidence this is underway, making housing a likely secular outperformer in the 2020s, and putting an end to the sector’s decade of meaningful underperformance in the 2010s.

Housing sector equities (i.e., homebuilders) do not look particularly expensive. Despite the sector’s strong performance YTD, housing stocks trade at a 1.6x forward price/book ratio. That ratio is a 16.5% discount vs. the average differential vs. the S&P 500 Index over the past 10 years.

Supply shortage: Autos

The auto shortage began in the summer months of 2020 as a result of COVID-19 lockdown measures and ensuing supply chain disruptions. Then, in 2021, a worldwide shortage of semiconductors further curtailed new automobile production. As soon as the U.S. government lifted travel restrictions, consumers took to the road and the used car market, which was the main source of supply, boomed. (Government fiscal and monetary stimulus, as well as a surge in regional migration patterns fueled those car purchases.)

Quantifying the auto shortage is trickier than quantifying the housing shortage, but we can usefully compare auto sales prior to the pandemic vs. what transpired throughout the pandemic. Pre-pandemic, about 17 million U.S. light vehicles were sold annually; since then, 14.5 million were sold in 2020, 14.9 million in 2021 and 13.8 million in 2022.

So, assuming the pandemic never hit—and growing the run-rate forward—the data would imply a cumulative under-shipment of almost 8 million light vehicles. To be sure, this is an simplification that likely overstates the shortage because it doesn’t account for higher sustained auto input costs, which have affected sales in recent years.6

Another way to assess the auto shortage involves inventories sitting on dealer lots. The chart below shows inventory as the number of selling days that it would take to exhaust dealer supply. Prior to the pandemic, dealers normally held about 60–70 days’ worth of supply on their lots—the current level is 20. In our view, we expect the industry to reach a new equilibrium of approximately 45–55 days’ worth of supply by mid-2024. Expected improvements in supply chain productivity (such as reduced vehicle complexity and greater automation in the production process) mean that the sector is unlikely to return to its pre-pandemic equilibrium.7

U.S. car dealers are still experiencing historically low inventory levels

Source: Haver Analytics, U.S. Bureau of Economic Analysis. Data as of March 31, 2023.
The chart describes domestic auto inventory as in number of selling days from 1995 to 2022. The first data point came in at 70 in Q1 1995. It fluctuated until it spiked at 98 in Q1 2009. Then it quickly come down and reached a low point at 48 in Q2 2011. Then it trended up and spiked again at 87 in Q2 2020. Later it fell all the way and the last data point came in at 20 in Q4 2022.

When it comes to the valuation of auto equities Tesla, which currently trades at a 65x forward price/earnings (P/E) multiple, stands apart. Tesla’s high multiple can be attributed to the company’s growth potential in the context of the global energy transition from fossil fuels to renewables and the concomitant shift to electric vehicles.8 Ford Motor Company and General Motors (whose stocks are up 33.8% and 13.5% YTD through mid-July, respectively) are not trading at expensive valuations—much like what we see in U.S. housing. Ford trades at a forward P/E discount of 3.5%, whereas General Motors’ P/E discount is 22.5%.9

As for where the auto and housing sectors may be headed, it’s also useful to note how quickly pandemic-related supply shortages were alleviated in household products (i.e., goods produced by the likes of Proctor & Gamble, Clorox and Colgate-Palmolive) vs. housing and autos.

Gross profit margins for these sectors reveal the dynamics in play: Margins rose in each as a result of the global pandemic and associated shortages, but—because of the greater difficulty in alleviating supply shortages in housing and autos—margins are still well above their pre-pandemic levels (chart below). In household products, by contrast, ramped up production (combined with cooling demand) alleviated shortages quite rapidly, resulting in margin compression to a level below pre-pandemic norms.

Household product shortages have resolved much faster than those in housing and autos

Source: Bloomberg Finance L.P. Data as of March 31, 2023.
The chart describes gross margins (4 quarter-moving-average) across 3 different sectors (homebuilding, auto and auto components, and household products). All three sectors are indexed at 100 for Q4 2019. For the homebuilding sector line, The first data point came in at 100 in Q4 2019. Later it trended up until it reached the highest point at 138.8 in Q4 2022. Then the series ended at 136.6 in Q1 2023. For the auto and auto components sector line, The first data point came in at 100 in Q4 2019. It fell to 73.8 in Q3 2020. Then it went up and stabilized. The last data point came in at 112.0 in Q1 2023. For the household products sector line, The first data point came in at 100 in Q4 2019. It went steadily up until the peak at 105.2 in Q2 2021. It then trended steadily downward until the last data point at 94.9 in Q1 2023.

Looking ahead, we expect to see auto margins normalize more quickly than housing margins. Notably, we wouldn’t be surprised to see housing margins remain above their pre-pandemic levels well into 2024 and possibly even into 2025. 

Excess supply: Office buildings

In our recent deep dive on commercial real estate, we explored the thesis that the office sector is experiencing a state of excess supply relative to demand for occupancy.10

That mismatch continues to put upward pressure on vacancy rates. Although we were likely to see some excess supply in this sector even if the pandemic had never hit (given the impact of property obsolescence), the onset of the global health crisis, the abrupt shift to remote work and layoffs in the technology industry have all weighed heavily over the past year. All are now contributing to the collapse in market values for REITs that have high exposure to offices.

Not all office assets are created equally, however: Aging properties in downtown central business districts (CBDs) in major U.S. cities are far more affected than suburban office assets. While office CBD vacancy rates continue to rise, suburban office vacancy rates have actually been falling in recent quarters (chart below). Offices make up approximately 15% of all commercial real estate, and CBD makes up about 60% of office, so about 9% of all CRE is challenged by escalating vacancy rates as a result of the pandemic shock. This dynamic underscores the sector-specific—or micro—nature of the problem.11

Vacancy rates in downtown office buildings have risen sharply since 2020

Source: National Council of Real Estate Investment Fiduciaries (NCREIF). Data as of March  31, 2023.
The chart describes office vacancy rates in % for suburbs and central business districts. For the suburbs line, The first data point came in at 15.1% in January 1990. It went all the way down until it bottomed out at 5.7% in April 1999. Then it went all the way up until it peaked at 16.4% in January 2004. Then it fell. The last data point came in at 10.5% in January 2023. For the central business districts line, The first data point came in at 12.2% in January 1990. It went up to a high level at 17.5% in January 1992. Then it went all the way down until it reached 5.0% in July 2000. Since then, it trended up. The series ended high with the last data point at 18.6% in January 2023.

Excess supply: Regional banks

The U.S. banking sector is also experiencing something akin to excess supply. Despite a dramatic decline in the number of U.S. banks over the past 30 years—the total has dropped by more than 70% since the early 1980s—the U.S. remains an outlier in a broader, international context. Our analysis in the chart below, which takes into account the number of banks in the system as well as deposit concentration, illustrates just how much of an anomaly the U.S. is, internationally.12

The U.S. banking system is far more crowded—and less concentrated—than most large markets

Source: Helgi Library, theglobaleconomy.com, Worldometer. Data as of June 30, 2023.
The chart describes bank system concentration measured by two approaches: % share of deposits held by the 3 largest banks, and banks per capita (million). Banks per capita (million) % share of deposits held by the 3 largest banks USA 13.5588 38.4 UNITED KINGDOM 4.581209 42.91 FRANCE 3.967919 66.26 ITALY 3.787514 62.58 GERMANY 3.091284 79.43 SPAIN 2.887405 71.96 RUSSIA 2.754661 50.4 CANADA 2.119646 60.75 JAPAN 0.917167 46.33 BRAZIL 0.555139 70.39 CHINA 0.134091 38.32 INDIA 0.116666 40.9

What is driving the wave of U.S. bank consolidation that began this spring? Uninsured deposits in the system are raising operational risks; changes in technology are making it easier than ever to move funds instantly using smartphone apps; information (about bank-specific vulnerabilities) can now travel at unprecedented speed via social media; and the banking sector is being affected by unusually high volatility in the interest rate cycle.13

To date, the recent consolidation wave looks comparable to previous waves, when scaled relative to U.S. GDP, as shown in the chart below. Prior waves included the savings and loan crisis in the late 1980s to early 1990s, and the GFC in 2008–09.

A third wave of U.S. banking system consolidation has begun

Source: Congressional Budget Office, Federal Deposit Insurance Corporation, Haver Analytics. Data as of May 31, 2023.
The chart describes the total assets of failed and assisted banking institutions as a % of potential GDP from 1960 to 2023. The data series started at 0.001% in 1960. It went up and reached its highest point at 3.014% in 1988. Shortly after, it fell and dropped back to a low level at 0.022% in 1994. It went flat until it skyrocketed again to 2.501% in 2008. Then it fell all the way and got back to a low level at 0.017% in 2014. It was stable and stayed flat until it went up again to 2.019% in 2023.

Although the acute phase of the current U.S. banking crisis appears to be coming to an end, additional bank failures cannot be ruled out entirely. In the coming quarters and years, market participants may continue to question the viability of certain business models in an environment of tighter regulation and higher funding costs.14

The AI revolution is currently visible as an expectation in financial markets; that is, it is not yet impacting real economic data. Simply put, if AI were driving the real economy, inflation would be among the least of economists’ worries, because the high productivity gains in production would quickly alleviate shortages in the real economy.

That said, the capital markets are pricing in an inflection point after which the adoption of AI may profoundly affect corporate earnings. This approach lets us fit a consideration of AI into our shortages/excesses framework: The outperformance of AI-related stocks—which are up 37% year to date through July—can be seen as driven by a perceived shortage of the necessary infrastructure required to power the AI revolution.

Have we seen this before?

In a word, yes. The most recent example would be the cloud computing revolution, which started with the launch of Amazon Web Services (AWS) in 2006. By 2011–2012, AWS was reporting accelerating revenue growth and had no real competition; Google and Microsoft Corporation didn’t begin to accrue meaningful gains in their cloud-based businesses’ revenue until 2015 or later.

At the time, the market assigned AWS's parent company, Amazon.com, a 70x–80x forward P/E valuation in recognition of its new technology (which, thanks to economies of scale, promised to substantially reduce data service costs for corporations). Amazon also benefited from a significant first-mover advantage: AWS had a competitive “moat,” or gap, surrounding its cloud-based business, which boosted the parent company’s earnings outlook.

Amazon’s multiple may have looked like an overvaluation at the time, but—as we look back now—it clearly wasn’t. The market was simply pricing in a dominant winner at the forefront of a business revolution sparked by a new technology.15

Amazon’s P/E multiple soared in the early stages of cloud computing

Source: Bloomberg L.P., Haver Analytics, J.P. Morgan Equity Research. Data as of June 30, 2023. *AWS revenue begins in 2013 and was extended back to 2009 using data processing intermediate inputs growth from the U.S. Bureau of Economic Analysis. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
The chart describes the year over year % change in AWS revenue from 2009 to 2022 and the AMZN 12-month forward p/e ratio from 2009 to 2022. For the AWS revenue line, It started at 3.25% in 2009. Then it went up and reached a peak at 69.7% in 2015. Then it went steadily down until the last data point at 28.8% in 2022. For the AMZN 12-month forward p/e ratio line, It started at 36.2 in 2009. Then it went up and reached a peak at 78.3 in 2015. Then it went steadily down until the last data point at 38.8 in 2022.
Today, we see a comparable dynamic occurring with U.S. software company Nvidia Corporation, which commands a dominant market share in making the specialized chips known as GPUs (graphics processing units) that are used in training generative AI models.16 Nvidia currently has a 95% market share for GPU chips used in data centers, which is up from 81% in 2016, as shown in the chart below.

Among GPU chip makers, Nvidia dominates the data center business

Source: Bloomberg Finance L.P. Data as of December 31, 2022.
This chart describes the server GPU share by Nvidia, AMD, and others from 2016 to 2022. Nvidia 81% 90% 94% 93% 93% 91% 95% AMD 2% 3% 5% 7% 7% 8% 5% Others 17% 7% 1% 0% 0% 1% 0% 2016 2017 2018 2019 2020 2021 2022

Nvidia currently trades at a 50x forward P/E multiple, which is lower than Amazon’s comparable multiple back in 2012–2015. Moreover, Nvidia’s competitive advantage in designing the chips used for generative AI is arguably even bigger than Amazon’s historical edge in cloud computing. GPU chip design entails laborious research and requires decades of internal company knowledge and patent creation; cloud computing may be more capital-intensive, but it does not require the same intensive research and development.17,  18

How do investors perceive Nvidia? Q1 2023 was a watershed moment. The company beat already lofty earnings estimates by more than 30%, signaling that accelerated AI-related demand from data centers is real and likely to continue.

Here’s another analogy: After Apple released its first iPhone toward the end of 2007, the company’s  subsequent earnings growth soared—and yet market participants failed to appreciate the product’s full implications. In every quarter from 2009–2012, Apple consistently beat earnings estimates by more than 20%. During this period, iPhone revenue rose from USD 13 billion annually to USD 79 billion. (A decade later, in 2022, iPhone revenue came in at USD 205 billion.)19 In 2009, Apple traded at a 30x forward price-earnings ratio, and just like Amazon in 2012–2015, that multiple wasn’t an overvaluation.

Many market observers anticipated that 2023 would be a year driven by macro factors, including the possibility—at the start of the year—of recession in the United States. That hasn’t happened, but large sectoral disparities have emerged in U.S. capital markets. Using a framework that emphasizes the role of shortages vs. excesses in the real economy can help investors make sense of these wildly different sector performances.

Although AI promises to be an exciting new investment theme, is the market getting ahead of itself when it comes to this groundbreaking technology’s potential benefits? We think the answer is “probably not,” based on our analysis of historical trading patterns and valuation changes in the wake of earlier technological breakthroughs (cloud computing and the iPhone).

AI certainly holds the promise of driving labor productivity growth in the years ahead. Yet the most exciting opportunity, in our view, will come from the intersection of AI and the real economy: Could AI help alleviate the shortages that have accumulated in the real economy from years (and in some cases decades) of underinvestment? This applies not only to housing and autos, where shortages have persisted post-pandemic, but also to the U.S. energy system and the nation’s infrastructure, which appears destined to benefit from a renewed focus on U.S. industrial policy. (See our recent article on renewed U.S. industrial policy.20)

In the months to come, investors will need to remain flexible and alert to the potential that shifting patterns of demand and supply may impact sectors of the economy differently. New shortages may appear and fundamental supply excesses may also be revealed. Further sector-specific rolling recessions may be inevitable if interest rates continue to rise, but some industries will likely keep benefitting from robust and ongoing demand. The four sectors we have identified—not to mention the enormous potential impact of AI on all corporate activity—provide some indication of just how careful and selective investors need to be.

1.This is not to say that U.S. recession risks are currently low; they continue to be elevated relative to historical norms and will remain so until there is more clarity surrounding potential job losses as the labor market continues to rebalance amid restrictive monetary policy. Also, when we say the economy is running too hot, we are referring to the inflation process rather than real economic activity. Real economic activity has been running at a below-potential pace of around 1% over roughly the last year. See: Federal Reserve Bank of New York, Weekly Economic Index, June, 2023.

2High yield spreads over U.S. Treasuries have narrowed by approximately 70 basis points YTD as of mid-July 2023.

3Auto sector returns are heavily skewed by the doubling of Tesla’s share price this YTD through June 23, 2023. Excluding Tesla, the S&P 1500 Auto sector is still up 18% YTD June 23, 2023, which is above broad market returns.

4Global X Funds' Global X Artificial Intelligence & Technology ETF.

5Joe Seydl, Dan Alter, “Looking to buy or sell a house in today’s strange U.S. market?” J.P. Morgan Private Bank, April 17, 2023. More specifically, we assume the housing market was in equilibrium in 1996, and then we consider the difference between the average of starts/completions and trend household formation from 1996 to present, assuming 200,000 housing units lost each year due to obsolescence.

6The weighted average cost of raw materials used to produce an automobile rose 116% YoY in 2021, the most ever. Raw material costs have since been subsiding but remain materially elevated vs. pre-pandemic, and non-commodity supply chain costs remain at a premium as well. In addition, labor costs will likely take another step up with UAW contracts up for renewal this September.

7Ryan Brinkman & Rajat Gupta, “2023 CMD Fleshes Out Margin Expansion Strategy; Work Cut Out for Model But We Think Pro Can Deliver” J.P. Morgan Securities Research,  May 23, 2023.

8Another way of looking at the valuation of Tesla would be to consider its forward price-to-earnings-to-growth (PEG) ratio, which—at 1.96—is below that of other fast-growing companies, such as Apple (2.22) and Microsoft (2.04).

9We define the forward P/E discount as the discount relative to the average differential vs. the S&P 500 Index over the past 10 years.

10Joe Seydl, Jay Serpe, Ryan Asato, “Are banks vulnerable to a crisis in commercial real estate?” J.P. Morgan Private Bank, April 12, 2023.

11We say “as a result of the pandemic shock” because there are other areas of CRE that are distressed, such as older retail shopping malls due to the penetration of online shopping. The retail distress is not new, however, and has not been the primary focus of investors in recent quarters. 

12The United States has far more banks than many other countries due to the history of its banking system. Until 1994, various financial regulations prevented banks from operating on a national scale—or even across state lines. The passage of the Riegle-Neal Interstate Banking Act of 1994, however, finally lifted all interstate banking restrictions. Since then, the number of U.S. banks has decreased by a rate of ~3% annually. (Sources: Marc Rubinstein, “The US Is Paying the Price for Being Overbanked,” Bloomberg, March 29, 2023 and “Why America has so many banks,” The Economist, May 26, 2023.)

13The rates cycle is important, but it needs to be understood in the context of accelerating deposit outflows at some unusual institutions that lacked a “sticky” deposit base. There is no inherent reason why the banking system as a whole should be especially sensitive to higher interest rates, given that deposit franchise values tend to rise to offset asset value losses when interest rates rise. See: Itamar Drechsler, Alexi Savov, and Philipp Schnabl, “Banking on Deposits: Maturity Transformation without Interest Rate Risk”, The Journal of Finance, June 2021.

14From a regulatory perspective, increased capital and funding requirements are likely. We also note growing bipartisan political support for lowering the global systemically important banks (GSIB) regulatory threshold from USD 250 billion to USD 100 billion (but that change is not likely to be enacted until after the 2024 U.S. presidential election).

15Another way to look at this would involve considering the stock performance of Amazon after its peak forward P/E multiple was achieved in February 2015. Since then until now, the total return of Amazon’s stock has reached 582%, which compares to 152% for the S&P 500 Index as a whole.

16Unlike past forms of AI, generative AI produces novel, human-like output in the form of text, images and three-dimensional models, and in some contexts has been shown to be able to match or exceed human benchmarks.

17Kunjan Sobhani and Oscar Hernandez Tejada, “Expanding Nvidia's Total Addressable Market,” Bloomberg Intelligence, May 22, 2023.

18Nvidia’s competitive advantage can also be attributed to the company’s AI-related software offerings (in addition to chip design). For example, Nvidia provides a suite of cloud services, pre-trained AI models, optimized inference engines, and application programming interfaces (APIs) for specific enterprise applications, including those in the domains of robotics, automotives and the health care industry.

19David Curry, “Apple Statistics 2023,” Business of Apps, May 2, 2023.

20Joe Seydl, Jessica Matthews, Ian Schaeffer, “The opportunity in renewed U.S. industrial policy,” J.P. Morgan Private Bank, June 1, 2023.

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Index definitions:

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

S&P Homebuilders Select Industry Index: it comprises stocks from the S&P Total Market Index that are classified in the GICS Homebuilding sub-industry.

The S&P Composite 1500® Automobiles & Components (Industry Group) comprises those companies included in the S&P Composite 1500® that are classified as members of the GICS® Automobiles & Components industry group.

iShares U.S. Regional Banks ETF is an exchange-traded fund incorporated in the USA. The Fund seeks investment results that correspond generally to the price and yield performance of the Dow Jones US Select Regional Banks Index.

The BBREIT Office Property Index is a capitalization-weighted sub-index of the Bloomberg REIT Index. The index is based on office properties comprising 75 % or more of invested assets and was developed with a base value of 100 as of December 31, 1993. The parent index is BBREIT.

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This material is for informational purposes only, and may inform you of certain products and services offered by private banking businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at accessibility.support@jpmorgan.com for assistance. Please read all Important Information.

General Risks & Considerations

Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g., equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan team.

Non-Reliance

Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/ reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.

Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.

IMPORTANT INFORMATION ABOUT YOUR INVESTMENTS AND POTENTIAL CONFLICTS OF INTEREST

Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.

Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward-looking views in order to meet the portfolio’s investment objective.

As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to 100 percent) in strategies such as, for example, cash and high-quality fixed income, subject to applicable law and any account-specific considerations.

While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios.

The Six Circles Funds are U.S.-registered mutual funds managed by J.P. Morgan and sub-advised by third parties. Although considered internally managed strategies, JPMC does not retain a fee for fund management or other fund services.

Legal Entity, Brand & Regulatory Information

In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.

JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPM. Products not available in all states.

In Germany, this material is issued by J.P. Morgan SE, with its registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt am Main, Germany, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB). In Luxembourg, this material is issued by J.P. Morgan SE—Luxembourg Branch, with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE—Luxembourg Branch is also supervised by the Commission de Surveillance du Secteur Financier (CSSF); registered under R.C.S Luxembourg B255938. In the United Kingdom, this material is issued by J.P. Morgan SE—London Branch, registered office at 25 Bank Street, Canary Wharf, London E14 5JP, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE—London Branch is also supervised by the Financial Conduct Authority and Prudential Regulation Authority. In Spain, this material is distributed by J.P. Morgan SE, Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE, Sucursal en España is also supervised by the Spanish Securities Market Commission (CNMV); registered with Bank of Spain as a branch of J.P. Morgan SE under code 1567. In Italy, this material is distributed by J.P. Morgan SE—Milan Branch, with its registered office at Via Cordusio, n.3, Milan 20123, Italy, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE—Milan Branch is also supervised by Bank of Italy and the Commissione Nazionale per le Società e la Borsa (CONSOB); registered with Bank of Italy as a branch of J.P. Morgan SE under code 8076; Milan Chamber of Commerce Registered Number: REA MI 2536325. In the Netherlands, this material is distributed by J.P. Morgan SE—Amsterdam Branch, with registered office at World Trade Centre, Tower B, Strawinskylaan 1135, 1077 XX, Amsterdam, The Netherlands, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE—Amsterdam Branch is also supervised by De Nederlandsche Bank (DNB) and the Autoriteit Financiële Markten (AFM) in the Netherlands. Registered with the Kamer van Koophandel as a branch of J.P. Morgan SE under registration number 72610220. In Denmark, this material is distributed by J.P. Morgan SE—Copenhagen Branch, filial af J.P. Morgan SE, Tyskland, with registered office at Kalvebod Brygge 39-41, 1560 København V, Denmark, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE—Copenhagen Branch, filial af J.P. Morgan SE, Tyskland is also supervised by Finanstilsynet (Danish FSA) and is registered with Finanstilsynet as a branch of J.P. Morgan SE under code 29010. In Sweden, this material is distributed by J.P. Morgan SE—Stockholm Bankfilial, with registered office at Hamngatan 15, Stockholm, 11147, Sweden, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE—Stockholm Bankfilial is also supervised by Finansinspektionen (Swedish FSA); registered with Finansinspektionen as a branch of J.P. Morgan SE. In France, this material is distributed by JPMorgan Chase Bank, N.A.—Paris Branch, registered office at 14, Place Vendome, Paris 75001, France, registered at the Registry of the Commercial Court of Paris under number 712 041 334 and licensed by the Autorité de contrôle prudentiel et de resolution (ACPR) and supervised by the ACPR and the Autorité des Marchés Financiers. In Switzerland, this material is distributed by J.P. Morgan (Suisse) SA, with registered address at rue du Rhône, 35, 1204, Geneva, Switzerland, which is authorized and supervised by the Swiss Financial Market Supervisory Authority (FINMA) as a bank and a securities dealer in Switzerland.

This communication is an advertisement for the purposes of the Markets in Financial Instruments Directive (MIFID II) and the Swiss Financial Services Act (FINSA). Investors should not subscribe for or purchase any financial instruments referred to in this advertisement except on the basis of information contained in any applicable legal documentation, which is or shall be made available in the relevant jurisdictions (as required).

In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore. JPMorgan Chase Bank, N.A., a national banking association chartered under the laws of the United States, and as a body corporate, its shareholder’s liability is limited.

With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction.

JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

This material has not been prepared specifically for Australian investors. It:

  • May contain references to dollar amounts which are not Australian dollars;
  • May contain financial information which is not prepared in accordance with Australian law or practices;
  • May not address risks associated with investment in foreign currency denominated investments; and
  • Does not address Australian tax issues.

References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM. This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan team.

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JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("JPMS"), a member of FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states. Please read the Legal Disclaimer in conjunction with these pages.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

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