5 actions investors can take now

Last week’s macro mania gave us confidence in our Mid-Year Outlook.

Disinflation is sending a cool wave through the summer heat. This was good news for the Federal Reserve, which signaled that when it does make its next move, it’ll be a cut. AI momentum just keeps building. Stocks are hitting more new highs and bonds are rallying, but it’s not all straightforward—risks remain, not least from the growing list of upcoming elections.

How do investors play it in their portfolios? Here are five actions worth considering today.

Continue to move out of cash

Wednesday brought a doubleheader with the latest U.S. CPI print and a Fed policy meeting. It was good vibes only.

Both headline and core CPI cooled to the slowest pace we’ve seen in years. The key downside driver was “sticky” services, as Chair Powell’s “super core” services ex-shelter gauge actually fell (i.e., deflated) in May for the first time since 2021. A few hours later, the Fed signaled that the economy can handle higher rates for a bit longer and that the next move is still lower—shifting its projections from three cuts this year to just one while awaiting further inflation progress. 

Meanwhile, the race to rate cuts is already on elsewhere. Out of 37 central banks we track, 20 are now in easing mode. This means that for the first time in over two years, more central banks are cutting rather than hiking.

Times are changing. Cash has played a noble role in portfolios over the last two years and is a necessary part of any lifestyle. But even if policy rates settle in a higher range than the last cycle, the shift away from global tightening, albeit staggered, signals that today’s elevated cash yields won’t last forever. Last week alone, 2-year Treasury yields fell 20 basis points. Meanwhile, U.S. households hold over $20 trillion in cash across checking accounts, time deposits and money market funds, compared to roughly $15 trillion in 2019. The story isn’t too dissimilar on this side of the pond either, even with the European Central Bank already underway with rate cuts.

We believe better opportunities exist today, especially for long-term investors looking to grow and compound their wealth over time.

Embrace equity exposure

The S&P 500 has now made 29 record highs this year. Looking back since 1950, whenever we’ve seen this many all-time highs in the first half of the year, the full year has averaged a 20% return.

Today’s backdrop looks poised to continue the upside trend. The economy is at its healthiest in decades, and inflation looks to eventually settle into a 2%–3% range. That’s historically been one of the best eras for stocks. Inflation below 3% tends to support equity valuations and benefit earnings, with companies able to raise prices while also managing costs.

We’re seeing this in action: Profit margins in developed economies are near their strongest levels in decades, signaling that companies are more efficient at turning sales into profits. To boot, mega-cap firms have demonstrated exceptional earnings power despite higher rates, and it doesn’t stop there: the latest Q1 earnings season saw eight out of 11 S&P 500 sectors post profit growth, with 80% of companies beating expectations (well above the 10-year average).

But within that strength, investors should note dispersion beneath the surface. Currently, less than one-quarter of stocks have outperformed the S&P 500’s 15% year-to-date total return, near the lowest share in the past 10 years. This creates opportunities for active investment decisions. We see some of the strongest potential across sectors such as technology, industrials, consumer discretionary and healthcare, and are always on the hunt for mispricings. For instance, some of the highest-quality small- and mid-cap companies are trading at a meaningful discount to their large-cap peers. 

Lean in to credit opportunities

After the rate reset, bonds are back to being bonds. Most pockets of fixed income, outside of Treasuries, are now outyielding cash for the first time in two years. As a strong (albeit slowing) economy keeps default rates low, we think investors can pick up even greater yields by going out on the credit risk spectrum—building in strong income potential as well as insulation in the event of a downturn.

The opportunities aren’t exclusive to “traditional” credit markets though. Other pockets of the investing landscape show why it’s a good time to be a new lender. Direct lending, a segment of private credit, is offering yields around 11%. We think this more than compensates investors for potential default losses. Elsewhere, specialized credit investors can capitalize on the reality that not all borrowers are created equal, stepping in to help companies and their creditors renegotiate their agreements. Such “amend and extend” transactions increased tenfold between 2022 and 2023.

Position for the AI revolution—but be discerning

Last week’s news flow has only added to the AI buzz with the announcement of “Apple Intelligence,” alongside stellar earnings reports from the likes of software leaders Oracle and Adobe, and chipmaker Broadcom. Combined, those four companies added more than $450 billion to the S&P 500’s market cap last week.

In all, the market seems to be sussing out which AI players can demonstrate real productivity gains, revenue creation, or both. That approval does not come easy—even for tech giants. For example, Apple has lagged behind its “Magnificent 7” counterparts for most of the year, and it even took a few days for markets to welcome its latest efforts.

In time, we believe the potential-use cases span almost every industry, and that’s not to mention the massive infrastructure needed to power it. One inquiry on ChatGPT requires up to 10x more power than a traditional web search. As we decipher the power and capabilities of AI, we believe it will be transformative, akin to the internet and the steam engine. But as in those times too, a discerning eye is key. Some of the future winners may not even exist yet.

Add armor to your portfolio

Risks of all kinds are apparent. For instance, last week brought word that France is joining the election party, and the injection of more political risk brought its fair share of jitters.

French President Macron’s decision to take the nation to the polls caught many off guard. After his “centrist” Renaissance party lost major ground in the EU parliamentary, this move looks to be a bid to consolidate power. The election, with two rounds scheduled on June 30 and July 7, aims to elect 577 MPs to the French National Assembly. And while Macron will remain in his seat as President until at least 2027, the outcome of these elections could significantly impact the ability to pass legislation.

That election uncertainty sent European markets into a tailspin: the euro hit a two-year low against the pound, European equities grinded lower, and French bond yields surged. In fact, borrowing costs in France now exceed those in Germany by the most since the eurozone debt crisis more than a decade ago. That discounts a sizeable chunk of political risk premium.

But even as France’s CAC 40 Index was down more than 6% on the week, the MSCI World still posted gains. That signals how markets closest to key events and uncertainties can be particularly sensitive, but more often than not, they do not derail the broader global economic and market backdrop.

In turn, the overarching theme of our Mid-Year Outlook rests on the fact that global economic strength exists alongside genuine risks that warrant monitoring, especially around elections and continued geopolitical turmoil. This requires investors to be alert and to insulate portfolios from destabilizing events—whether that be through diversification, tax-efficient planning or investments oriented around the changing world order.

In all, we see a strong economy in a fragile world. To us, that looks like a healthy backdrop for investors as they prepare for the second half of 2024. Read our Mid-Year Outlook and discuss it with your J.P. Morgan advisor for more on these insights.