We still prefer stocks over bonds, and cash will be a portfolio drag for another few years.
The COVID-19 recovery continues to significantly outpace the recovery from the Global Financial Crisis (GFC), moving the U.S. economy quickly from early cycle to now at mid-cycle. But that doesn’t necessarily mean that growth will slow significantly.
We expect growth in the U.S. to remain above 2.25% for the next two years. While the inflation debate rages on, recent inflation prints have reinforced our view of “transitory” inflation. Market-based inflation expectations agree with our view. China is further ahead in this cycle, having entered and exited the crisis earlier than the rest of the world. Policymakers there have been normalizing policies for almost a year now. And as exports have likely peaked, policymakers have turned their focus to supporting domestic demand in the second half of 2021, pivoting towards a more accommodative policy mix. Meanwhile, Europe’s vaccination rollout has been staggered, but we are still confident in the rebound.
While we are still positive on equities, but we see trend-like returns going forward, driven by earnings. On the earnings side, we anticipate continued strong EPS growth, but acknowledge the rate of growth and revisions are peaking.
As we enter the second quarter reporting period, we expect ~70% year-over-year earnings growth for the S&P 500 before fading to 20% in the second half. Excluding China, most global markets are likely to see earnings crest in Q2. This might not be a surprise nor a negative for stocks, it is consistent with a mid-cycle transition. Valuations, which peaked in the U.S. in September 2020, will likely limit potential returns.
After significant one-year outperformance of value and cyclicality, we continue to like Financials, Industrials and Basic Materials, but we are also turning more positive on technology and healthcare. Easy financial conditions and record cash flows support emerging themes like automation and infrastructure. We remove our tactically positive view of the energy sector.
Internationally, policy initiatives like the EU Recovery Fund might accentuate that region’s cyclical expansion. Some parts of Emerging markets remain compelling, but a bias towards dollar strength limits potential outperformance over the shorter term.
We are taking advantage of outperformance in Russia and India to take profits and re-engaging in the China offshore market after recent underperformance.
We recommend Italy, the UK and Germany in Europe as well as the China on-shore (A-share) market, Taiwan, and Japan in Asia.
While 10 year Treasury rates rallied in the second quarter, we expect them to rise over the next 12 months, to reach 2.1% by mid-2022. Long credit risk has been the right call – and it still is, but we moderate total return expectations. In the FX market, the sensitivity of currencies to interest rate differentials proved a useful guide to FX performance in the first half of the year; this might largely remain the case in the second half of the year. We now expect modest USD strength vs. low-yielders like Japanese Yen, Swiss Franc and Euro whose accommodative monetary policy is most firmly anchored. Higher core developed market yields could serve as a headwind to emerging market currencies; where investors need to be more selective and tactical. Broadly as we move into mid-cycle we are still pro-risk and favor a tilt towards cyclicals and reflation trades, but recommend being more selective as the easy gains are likely behind us. The COVID-19 recovery continues to significantly outpace the recovery from the Global Financial Crisis (GFC), moving the U.S. economy quickly from early cycle to now at mid-cycle. But that doesn’t necessarily mean that growth will slow significantly.
We expect growth in the U.S. to remain above 2.25% for the next two years. While the inflation debate rages on, recent inflation prints have reinforced our view of “transitory” inflation. Market-based inflation expectations agree with our view. China is further ahead in this cycle, having entered and exited the crisis earlier than the rest of the world. Policymakers there have been normalizing policies for almost a year now. And as exports have likely peaked, policymakers have turned their focus to supporting domestic demand in the second half of 2021, pivoting towards a more accommodative policy mix. Meanwhile, Europe’s vaccination rollout has been staggered, but we are still confident in the rebound.
While we are still positive on equities, but we see trend-like returns going forward, driven by earnings. On the earnings side, we anticipate continued strong EPS growth, but acknowledge the rate of growth and revisions are peaking.
As we enter the second quarter reporting period, we expect ~70% year-over-year earnings growth for the S&P 500 before fading to 20% in the second half. Excluding China, most global markets are likely to see earnings crest in Q2. This might not be a surprise nor a negative for stocks, it is consistent with a mid-cycle transition. Valuations, which peaked in the U.S. in September 2020, will likely limit potential returns.
After significant one-year outperformance of value and cyclicality, we continue to like Financials, Industrials and Basic Materials, but we are also turning more positive on technology and healthcare. Easy financial conditions and record cash flows support emerging themes like automation and infrastructure. We remove our tactically positive view of the energy sector.
Internationally, policy initiatives like the EU Recovery Fund might accentuate that region’s cyclical expansion. Some parts of Emerging markets remain compelling, but a bias towards dollar strength limits potential outperformance over the shorter term.
We are taking advantage of outperformance in Russia and India to take profits and re-engaging in the China offshore market after recent underperformance.
We recommend Italy, the UK and Germany in Europe as well as the China on-shore (A-share) market, Taiwan, and Japan in Asia.
While 10 year Treasury rates rallied in the second quarter, we expect them to rise over the next 12 months, to reach 2.1% by mid-2022. Long credit risk has been the right call – and it still is, but we moderate total return expectations. In the FX market, the sensitivity of currencies to interest rate differentials proved a useful guide to FX performance in the first half of the year; this might largely remain the case in the second half of the year. We now expect modest USD strength vs. low-yielders like Japanese Yen, Swiss Franc and Euro whose accommodative monetary policy is most firmly anchored. Higher core developed market yields could serve as a headwind to emerging market currencies; where investors need to be more selective and tactical. Broadly as we move into mid-cycle we are still pro-risk and favor a tilt towards cyclicals and reflation trades, but recommend being more selective as the easy gains are likely behind us.
We expect growth in the U.S. to remain above 2.25% for the next two years. While the inflation debate rages on, recent inflation prints have reinforced our view of “transitory” inflation. Market-based inflation expectations agree with our view. China is further ahead in this cycle, having entered and exited the crisis earlier than the rest of the world. Policymakers there have been normalizing policies for almost a year now. And as exports have likely peaked, policymakers have turned their focus to supporting domestic demand in the second half of 2021, pivoting towards a more accommodative policy mix. Meanwhile, Europe’s vaccination rollout has been staggered, but we are still confident in the rebound.
While we are still positive on equities, but we see trend-like returns going forward, driven by earnings. On the earnings side, we anticipate continued strong EPS growth, but acknowledge the rate of growth and revisions are peaking.
As we enter the second quarter reporting period, we expect ~70% year-over-year earnings growth for the S&P 500 before fading to 20% in the second half. Excluding China, most global markets are likely to see earnings crest in Q2. This might not be a surprise nor a negative for stocks, it is consistent with a mid-cycle transition. Valuations, which peaked in the U.S. in September 2020, will likely limit potential returns.
After significant one-year outperformance of value and cyclicality, we continue to like Financials, Industrials and Basic Materials, but we are also turning more positive on technology and healthcare. Easy financial conditions and record cash flows support emerging themes like automation and infrastructure. We remove our tactically positive view of the energy sector.
Internationally, policy initiatives like the EU Recovery Fund might accentuate that region’s cyclical expansion. Some parts of Emerging markets remain compelling, but a bias towards dollar strength limits potential outperformance over the shorter term.
We are taking advantage of outperformance in Russia and India to take profits and re-engaging in the China offshore market after recent underperformance.
We recommend Italy, the UK and Germany in Europe as well as the China on-shore (A-share) market, Taiwan, and Japan in Asia.
While 10 year Treasury rates rallied in the second quarter, we expect them to rise over the next 12 months, to reach 2.1% by mid-2022. Long credit risk has been the right call – and it still is, but we moderate total return expectations. In the FX market, the sensitivity of currencies to interest rate differentials proved a useful guide to FX performance in the first half of the year; this might largely remain the case in the second half of the year. We now expect modest USD strength vs. low-yielders like Japanese Yen, Swiss Franc and Euro whose accommodative monetary policy is most firmly anchored. Higher core developed market yields could serve as a headwind to emerging market currencies; where investors need to be more selective and tactical. Broadly as we move into mid-cycle we are still pro-risk and favor a tilt towards cyclicals and reflation trades, but recommend being more selective as the easy gains are likely behind us. The COVID-19 recovery continues to significantly outpace the recovery from the Global Financial Crisis (GFC), moving the U.S. economy quickly from early cycle to now at mid-cycle. But that doesn’t necessarily mean that growth will slow significantly.
We expect growth in the U.S. to remain above 2.25% for the next two years. While the inflation debate rages on, recent inflation prints have reinforced our view of “transitory” inflation. Market-based inflation expectations agree with our view. China is further ahead in this cycle, having entered and exited the crisis earlier than the rest of the world. Policymakers there have been normalizing policies for almost a year now. And as exports have likely peaked, policymakers have turned their focus to supporting domestic demand in the second half of 2021, pivoting towards a more accommodative policy mix. Meanwhile, Europe’s vaccination rollout has been staggered, but we are still confident in the rebound.
While we are still positive on equities, but we see trend-like returns going forward, driven by earnings. On the earnings side, we anticipate continued strong EPS growth, but acknowledge the rate of growth and revisions are peaking.
As we enter the second quarter reporting period, we expect ~70% year-over-year earnings growth for the S&P 500 before fading to 20% in the second half. Excluding China, most global markets are likely to see earnings crest in Q2. This might not be a surprise nor a negative for stocks, it is consistent with a mid-cycle transition. Valuations, which peaked in the U.S. in September 2020, will likely limit potential returns.
After significant one-year outperformance of value and cyclicality, we continue to like Financials, Industrials and Basic Materials, but we are also turning more positive on technology and healthcare. Easy financial conditions and record cash flows support emerging themes like automation and infrastructure. We remove our tactically positive view of the energy sector.
Internationally, policy initiatives like the EU Recovery Fund might accentuate that region’s cyclical expansion. Some parts of Emerging markets remain compelling, but a bias towards dollar strength limits potential outperformance over the shorter term.
We are taking advantage of outperformance in Russia and India to take profits and re-engaging in the China offshore market after recent underperformance.
We recommend Italy, the UK and Germany in Europe as well as the China on-shore (A-share) market, Taiwan, and Japan in Asia.
While 10 year Treasury rates rallied in the second quarter, we expect them to rise over the next 12 months, to reach 2.1% by mid-2022. Long credit risk has been the right call – and it still is, but we moderate total return expectations. In the FX market, the sensitivity of currencies to interest rate differentials proved a useful guide to FX performance in the first half of the year; this might largely remain the case in the second half of the year. We now expect modest USD strength vs. low-yielders like Japanese Yen, Swiss Franc and Euro whose accommodative monetary policy is most firmly anchored. Higher core developed market yields could serve as a headwind to emerging market currencies; where investors need to be more selective and tactical. Broadly as we move into mid-cycle we are still pro-risk and favor a tilt towards cyclicals and reflation trades, but recommend being more selective as the easy gains are likely behind us.
We look for global growth to moderate, but still remain above trend.
The COVID-19 recovery continues to significantly outpace the recovery from the Global Financial Crisis (GFC). By the end of this year, we expect the world’s major economies to be in mid-cycle, a development which took more than five years to reach following the GFC. In this environment we look for global growth to moderate, but still remain above trend. In the U.S., we expect growth to remain above 2.25% real GDP for the next 2 years. While the inflation debate rages on, recent inflation prints have reinforced our view of “transitory” as much of the surge in Q2 was from the auto sector (clearly supply bottlenecks) – critically market-based inflation expectations agree with our view. Over the long run, our view of higher potential U.S. GDP could actually serve to further blunt inflationary pressures, release pressure on the Fed to abruptly tighten monetary policy, and elongate the mid-cycle.
Elsewhere, economic recoveries have been uneven. China is far ahead, having entered and exited the crisis earlier than the rest of the world. Growth in China has already started moderating and policy shifting towards a more supportive stance. Meanwhile, Europe’s vaccination rollout has been staggered, but we are still confident in the rebound. We see the risks to the recovery as relatively balanced. Areas of concern include stretched valuations and sentiment, looming Fed tapering, the potential for more persistent inflation, and risks around slow vaccination progress or rising infections that bring new mobility restrictions. Corporate taxes remain the most important issue for the U.S. market.
Stock price momentum remains positive, but our base case calls for more trend-like total returns driven by earnings.
The S&P 500 Index posted its second-best first half gain (+14.4%) since the dot com bubble and its fifth straight quarterly gain in Q2. Looking forward, we anticipate continued strong earnings-per-share (EPS) growth, but acknowledge the rate of growth and revisions are peaking. As we enter the Q2 reporting period, we expect ~70% year-over-year earnings growth for the S&P 500 before fading to 20% in the second half. Excluding China, most global markets are likely to see earnings crest in Q2. This should not be a surprise nor a negative for stocks, it is consistent with a mid-cycle transition.
Valuations, which peaked in the U.S. in September 2020, will likely limit potential returns. We expect the global equity “valuation fade” to be less pronounced than prior cycles given the low, absolute level of interest rates and easy financial conditions. Recall, there have been many periods where equity valuations have stayed above average without low interest rates supporting the asset class.
“Positively re-balance” in equities – add to growth while maintaining exposure to cyclicals.
After significant one-year outperformance of value and cyclicality, we continue to advocate for these factors and geographies that underperformed systemically in the decade leading up to COVID. Financials, Industrials and Basic Materials and global markets with the greatest exposures to these sectors will likely do well, consistent with rising long-dated rates. Easy financial conditions and record cash flows support emerging themes like automation and infrastructure. With crude prices having recovered to our commodity team’s expected range, we remove our tactically positive view of the energy sector. While the macro environment remains supportive of cyclicals, leading indicators are starting to peak, which makes growth equities turn more attractive. Technology remains a recommended sector and is re-joined by Healthcare, which now screens as inexpensive with some catalysts on the horizon.
Internationally, policy initiatives like the EU Recovery Fund could accentuate that region’s cyclical expansion. Emerging markets remain compelling, but a bias towards dollar strength limits potential outperformance shorter term. We are taking advantage of outperformance in Russia and India to take profits and re-engaging in the China offshore market after recent underperformance. We recommend Italy, the UK and Germany in Europe as well as the China on-shore (A-share) market, Taiwan, and Japan in Asia.
Fix rates now and keep interest rate risk low.
While 10-year Treasury rates rallied in Q2, we expect yields to rise over the next 12 months. The move lower in rates over the last three months has been driven by technical factors like positioning, liquidity dynamics, and relative value to other global sovereigns; over the next 12 months we expect fundamentals to prevail and drive 10-year Treasury yields to 2.10%. In the meantime, we want to lock-in rates, keep interest rate risk low, and reimagine the “40” in a 60/40 portfolio by looking to illiquid alternatives as a substitute for core allocations.
Long credit risk has been the right call – and it still is, but moderate total return expectations.
U.S. High Yield have returned over 4% vs. negative total returns from core allocations. Going forward, returns will mostly come from carry. With full valuations and expectations for higher long-dated interest rates, fixed income becomes a mostly relative value game. For example, Upper Tier High Yield trade has returned 22% since April 2020, but at current spread levels forward total returns are likely to be less than 2% more than the return from 5yr Treasuries. Corporate hybrids, which are down in the capital structure, offer attractive relative value. Asia credits also enjoy a good buffer over U.S. yields. For some, defensive equities may also be a solution to consider.
Diverging monetary policies become the key theme for FX markets and that favors USD strength.
The sensitivity of currencies to interest rate differentials proved a useful guide to FX performance in the first half of the year; this may largely remain the case in the second half of the year. For the USD, the June FOMC meeting was an important marker in this respect. From here on out (barring another negative shock), we expect the Fed to methodically withdraw policy accommodation, leading to higher nominal and real yields. The Fed has in effect curtailed the possibility of multi-year policy inaction in the face of a robust recovery, a key tenet for those hoping for more negative real yields and broad-based USD depreciation. We now expect modest USD strength vs. low-yielders like JPY, CHF and EUR whose monetary policy is most firmly anchored. Higher core DM yields will serve as a headwind to EM FX; we see only a handful as viable longs, and tactical at that (i.e. CNH, MXN, RUB).
Index: The Standard and Poor’s 500 Index is a capitalization-weighted index of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% of available market capitalization.
All market and economic data as of July 15, 2021 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
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Structured products involve derivatives. Do not invest in these products unless you fully understand and are willing to assume the associated risks. The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with each individual structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss. The risks listed above are not complete. For a more comprehensive list of the risks involved with this particular product, please speak to your J.P. Morgan team. If you are in any doubt about the risks involved in the product, you may clarify with the intermediary or seek independent professional advice.
In discussion of options and other strategies, results and risks are based solely on hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option-related products in general, as well as the products or strategies discussed herein are suitable to their needs. In actual transactions, the client’s counterparty for OTC derivatives applications is JPMorgan Chase Bank, N.A. and its affiliates. For a copy of the “Characteristics and Risks of Standardized Options” booklet, please contact your J.P. Morgan team.
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