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Investment Strategy

The bull side, the bear side and the reality

U.S. equity markets made their first weekly gain after a four-week losing streak.

The Federal Reserve left rates unchanged, decreased growth forecasts and increased near-term inflation expectations, but signaled that its base case for tariff inflation is that it will be—gasp—transitory. Futures markets are now pricing two full interest rate cuts this year and about a 70% chance of a third. That sparked a rally in U.S. Treasury markets. Both the 2-year (3.95%) and 10-year (4.25%) yields dropped by 7 basis points (bps).

The Fed wasn’t the only central bank in focus. Both the Bank of England and Bank of Japan also kept rates unchanged. The BoE’s hold came with more cautious guidance. Their statement referenced that “global trade policy uncertainty has intensified” and “other geopolitical uncertainties have also increased.” The BoJ meanwhile hinted at future hikes, which helped to push long-dated Japanese Government Bond yields to 15-year highs.

In Europe, stocks resumed their strong performance. Last week, Germany approved legislation allowing defense spending in excess of 1% of GDP to be exempt from borrowing restrictions. This will unlock hundreds of billions in fiscal spend for the country, which could permeate throughout the Eurozone.

In commodities, investors continued to flock to safe-haven gold (+1.3%). The yellow metal broke through the $3,000/oz level for the first time ever as it made its 11th week of positive returns in the last 12 – its best streak in over a decade.

With markets looking for clues as to which way the next leg of the trade will go, below we assess the bull and bear cases.

Assessing the bull and bear case

This week marks the five-year anniversary of the ~35% drawdown of the S&P 500 during the COVID pandemic. As the world was going into lockdown, investors believed the risks to the outlook were clearly skewed to the downside. Today, the S&P 500 is hovering near correction territory (-10% from highs), and risks to the bull and bear cases seem more evenly distributed.

So far this year, the bears have been taking a victory lap. The S&P 500 is off to its third-worst start in the last 15 years. Softer economic data (purchasing manager surveys, consumer sentiment and homebuilders’ sentiment) has emerged, and consumer inflation expectations have risen. The bears would argue that tariff escalation on April 2 will exacerbate both. The tax on goods will be stagflationary, further driving up inflation while continuing to weigh on growth. That could leave the Fed in a difficult situation to manage its dual mandate of stable prices and maximum employment. It could also act as a drag on growth outside the United States.

The bulls would argue that it’s not about how you start the year, it’s how you finish. They would concede that the economic data referred to above has been weak. But those figures represent “soft” data (perceptions, opinions and expectations for economic conditions), not the “hard” data (realized economic activity such as employment figures and retail sales). The bulls would point to the fact that the actual realized economic activity has held up quite well.

“Hard data” is still holding up

Economic indicator values

Sources: Bloomberg Finance L.P., Haver Analytics, J.P. Morgan Wealth Management. Data as of March 20, 2025.
What’s more, the bulls would say that recent history suggests soft data has not been a good predictor of hard data, as Fed Chair Powell mentioned this week. From 2021 to 2023, an index of soft data showed a decline and reversal of five orders of magnitude, while hard data stayed about flat over the period.

Soft data isn’t always an indicator for hard data

U.S. economic momentum indicator, 26-week average

Sources: Haver Analytics, Bloomberg Finance L.P., J.P. Morgan Private Bank. Data as of March 8, 2025. Note: combined momentum across 27 (10 soft and 17 hard) U.S. economic data points. 
On inflation, the bulls would argue that the University of Michigan consumer expectations of an inflation increase is one data point. Other measures of inflation expectations haven’t seen an increase of the same magnitude, and in some instances, have actually shown a decline. Most importantly for the Fed and markets is that long-run inflation expectations remain anchored near the Fed’s 2% target to mitigate chances of a wage spiral.

Consumers have higher expectations for inflation

Estimates of inflation across various participants, %

Source: Bloomberg Finance L.P. Data as of March 20, 2025. Note: consumers = UMich Expected Change in Prices During the Next 5-10 Years (Median), swaps market = USD Inflation Swap Forward 5Y5Y, 10-year breakevens = US Breakeven 10 year, professional forecasters = Survey of Professional Forecasters 10-Year CPI Inflation Rate.

Every story has three sides: the bull case, the bear case, and reality. We believe reality lies somewhere in the middle.

At the start of the year, market consensus was pricing in minimal risk. Over the last three months, risks have increased, and prices have adjusted to reflect them. In our opinion, this represents a healthy correction and acknowledgment of the distribution of outcomes.

We sympathize with the bears: Risks still exist to our outlook. The tariff overhang could cause a wait-and-see approach toward capital allocation and slower growth. Increased goods inflation could persist if supply chains are in fact reshored. To manage those risks, we think it’s prudent for investors to add resilience to portfolios through assets such as gold (which can provide a hedge against uncertainty) and infrastructure assets (which can provide income and diversification from both stocks and bonds).

We think the bulls are right about inflation. Inflation expectations still remain anchored, and hard data has held up despite a shift in sentiment. In fact, poor sentiment may even present an opportunity. Going back to 1971, investing in the S&P 500 during the nine consumer sentiment troughs led to an average +24% return in the next 12 months. We think investing in U.S. equities from here can still provide attractive returns into year-end.

We would not let the bulls or the bears derail our investment plans. Remember everything that markets have experienced since the COVID drawdown five years ago: inflation reaching the highest level since the 1980s, global central bank rate hikes, the Russian invasion of Ukraine, bank failures and two changes in U.S. presidential administrations. The S&P 500 increased more than +150%.

Our advice when risks exist on either side of the outlook is to stick to a strategic asset allocation, use equities for long-term capital appreciation, fixed income to hedge during growth slowdowns, and make tactical adjustments at the margins to take advantage of opportunities that arise.

For help finding your strategic asset allocation, reach out to your J.P. Morgan team.

 

All market and economic data as of March 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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  • Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.


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U.S. equity markets made their first weekly gain in a month. What’s coming next?
Published Mar 24, 2025

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