Chaos vs Grand Design: Trump 2.0 for investors

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A wide golden line swirls against a shadowy background to form a signature. Logo: J.P. Morgan.

Text: ideas & insights

A man with short brown hair and glasses sits at a desk and faces us. A city skyline appears in the window behind him. Text: Michael Cembalest, Chairman of Market and Investment Strategy, J.P. Morgan Asset and Wealth Management.

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Good morning, everybody. This is Michael Cembalest. Thank you very much for joining our webcast. The topic today is Chaos vs Grand Design, Trump 2.0 for Investors. It's been a bumpy ride so far this year. I think the Street, in many ways, has gotten it wrong. The perception was that with people like Scott Bessent and Howard Lutnick and Chris Wright in the administration, that the administration would carefully balance their pro-growth, productivity enhancing policies with their anti-growth inflationary policies. So far, we've gotten a lot more of the latter than the former.

It's interesting. A few months ago, Scott Bessent was quoted as saying, "The tariff gun will always be loaded on the table, but rarely discharged." Charming metaphor. Scott should also remember that most gun accidents begin at the home. So that's-- that gun has been fired a lot more than Scott thought it would be.

So I'm going to take the next hour to walk you through the grand design of this Trump administration and the issues and challenges that it creates for investors. And I want to start by giving credit to the administration for the things that they're trying to address and that they're trying to solve. I'm going to try to apply some kind of grand design to this, so that we can understand what the implications are. So let's get started. Let's see if this thing works. OK.

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Text: The Alchemists' market correction but no recession. A line graph at left shows S&P 500 total returns, 0% at January 2025, rising, then dropping below negative 5% at February 28, 2025. Source: Bloomberg, J,P,M,A,M, March 17, 2025.

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So remember, when I wrote the outlook in the beginning of the year. I said whatever the goals are, I'm taking these alchemists at their word that they're going to break something. I wasn't sure what it would be, but with valuations as high as they were, I thought that equity markets would end the year higher than they began. But I expected a 10% to 15% correction at some point. I didn't expect it necessarily to take place within the first 50 days. We had that 10% correction. There's been a little bit of a bounce since then. And I still think that there's more shoes to drop, but I don't think we're going to have a recession this year.

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Text: What are they trying to fix: stagnating US production

The Silence of the Plants. A line graph appears that shows 2000 at 100 on the Y-axis for US consumer spending and US industrial production. Around 2024 shows spending approximately 170 and production below 120. Source: B,E,A, Federal Reserve, J,P,M,A,M, 2024

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So what is this administration, if you take them at their word, what are they trying to fix? And I've shown this chart before in a few presentations, and I think in the outlook. Ever since China joined the World Trade Organization a couple of decades ago, US consumer spending and GDP have done fine, but US industrial production has been stagnating. And that's been leading to all sorts of negative consequences, whether it's rising opioid addictions, and suicide rates, and falling manufacturing wages relative to service sector, and things like that. And so they're trying to fix this stagnating industrial production, which is kind of stuck in neutral.

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Text: What are they trying to fix: a lack of tariff reciprocity. A plot graph shows multiple markers to the right of the reciprocity line for tariffs applied to the US. Source: WTO, World Bank, J,P,M,A,M, 2015, or most recent available. Tariff is simple average of tariffs on traded goods

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And as part of that, the administration believes that the lack of tariff reciprocity is part of the problem. The chart here shows a reciprocity line. And as of 2016, when Trump took office, every single country on this chart applied a higher tariff to the United States than the United States charged in return. And while economists will tell you that this is perfectly normal, I think to a lot of people, in practice, it may not have been, and entailed certain cost for manufacturing communities that were very painful.

If you look back and try to think, where did this lack of tariff reciprocity come from?

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Text: US aid recipient alignment on important UN votes. A bar graph shows voting alignment with the US, 2003 to 2013. Israel is the highest at close to 100% with Pakistan the lowest at around 10%. Source: The Heritage Foundation, US AID, J,P,M,A,M, 2022

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It occurred during a period when the United States was negotiating favorable tariff deals for other countries in exchange for their support at the UN. Historically, the US has received very low returns on investment for those geopolitical kind of justifications. Here's one analysis of US aid recipient alignment on important UN votes. Aside from Israel, the Ukraine, the country of Georgia, and Peru, all of the rest of the US aid recipients voted less than 50% of the time with the US, most of them less than a quarter of the time. So if you're trying to provide geopolitical justifications for those unfavorable tariff arrangements, it's hard to do.

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A line graph appears. Text: US Trade balance of goods. Percent of US nominal GDP. Shows 1950 to around 2024 with the line consistently below 0 since the mid 1970s. Source: Bloomberg, Census Bureau, J,P,M,A,M, December 31, 2024

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They're also trying to fix this chronic deficit in traded goods. It was bad in the 80s, when people used to talk about twin deficits, but it's gotten a lot worse since then, and again, since China joined the World Trade Organization, we've basically had a roughly 4% to 6% chronic deficit in traded goods, which has made its way into the most critical national defense systems. This

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Text: Chinese Suppliers in US Air-Launched Armament Supply Chains 2023. Source: 'Numbers matter: defense acquisition", Govini, 2024

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complicated rubric, which you may see more of, shows, on the right, all the different Chinese suppliers and the products they flow into, which eventually make their way into some of the most critical US National Defense systems. So the Chinese supply chain has even infiltrated the US air launch armament supply chains, which is one of the most important parts of national defense.

So this is the kind of thing that they say they're trying to fix.

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Shows a line graph. Text: US vs European defense spending, Percent of GDP. The range is 1990 to 2025. US is above 5% in 1990, dipping steadily to 3%, 5% in 2010, to around 3% in 2024. NATO ex US remains under 2%. Source: NATO, World Bank, S,I,P,R,I, Federal Reserve, J,P,M,A,M, 2024

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They're also trying to address what they refer to as the NATO free riding problem. I've written about this for over 15 years. I think it's a fair issue. NATO made an agreement in 2006 to spend 2% of GDP on defense spending, and it took the NATO countries, x the US, almost 20 years to reach that level. And you can see here that in 2024, they finally made it. So it took them 18 years to get there. And part of the issue is that the underlying driver of low NATO defense spending appears to be proximity to Russia. So

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Text: European defense spending vs proximity to Russia, Defense spending as a share of GDP, 2024. A chart appears. Source: NATO, S,I,P,R,I, Bocconi Institute for European Policymaking, July 2024

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what this chart is showing you is, on the x-axis, the farther away you are from the Russian border, the lower your defense spending was, at least in 2024. And those are the Scandinavian countries at the upper left, or at least most of them, in places like Poland. So I think there are fair criticisms that can be leveled at an alliance where the farther away you are of the problem, the less you care enough to spend on it.

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Shows a color-coded map. Text: Visited by Chinese military transport aircrafts, 2020-2024

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They're also trying to fix the fact that the Chinese Belt and Road Initiative is not just an economic alliance. What this chart is showing is the orange countries are members of the Chinese Belt and Road Initiative, and the red countries are members where there have also been visitations by Chinese military transport aircraft. So I think there are a lot of questions that the United States is deservedly asking about what membership in the Chinese Belt and Road Initiative entails. And as it relates to Panama, why was Panama the first Latin American signatory to this initiative? There have been a lot of examples of Chinese investment in infrastructure and logistics, electricity generation and construction. And so there are a lot of legitimate questions, I think, that can be asked about Chinese infrastructure and Panama.

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A bar graph shows, text: Years required to replenish US ammunition stockpiles transferred to Ukraine. Source: "Rebuilding US Inventories: Six Critical Systems", Cancian (CSIS), January 2023

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They're also trying to address dwindling US ammunition stockpiles. This chart shows the number of years that would be required to replenish US ammunition stockpiles for certain key military items, based on the transfers that have taken place to Ukraine. And so you can see here that some of these are as little as two years, but some of them are as long as six years, eight years and 18 years. And if I'm doing my job right, everyone's going to have something to be upset about on this call.

And the transfers to Ukraine have resurfaced a lot of ideas that are hotly debated about the history of conflict in that region. I'm just going to show you here briefly. You can read it on your own. But there was a June 1997 letter to President Clinton from Bill Bradley, Gary Hart, Sam Nunn, Paul Nitze, Stansfield Turner, Robert McNamara and a bunch of other signatories of the Foreign Policy establishment that believed that the NATO expansion was an error, and that it would decrease regional security and unsettle European stability. And if you read the bullet points of what they said would happen, it looks like exactly what's happened. And that expansion would trigger an extended debate over NATO's cost and will call into question the US commitment to the alliance. That's exactly what's happened. And this isn't a question, Russian aggression against Ukraine. But this is part of the ideological basis that the administration is using to revisit it.

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A line graph shows, text: Entitlement spending mandatory outlays and net interest payments vs revenues, % of GDP. The time span is 1965 to about 2040 on the x axis in increments of 0 to 24% on the y axis. A lower line represents net interest, with revenues and entitlements close together after 2025. Source: Congressional Budget Office, J,P,M,A,M, January 2025

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They're also saying that they're trying to fix federal debt sustainability. And many of our clients know that I've been talking about this chart probably for 20 years. It's about the crossover point and the point at which federal government revenues are eclipsed only by interest on the federal debt and entitlements. It now looks like early in the 2030s, that's going to happen. So I personally don't believe that DOGE is a serious effort at addressing this. And we'll talk about that in a few minutes. But this is the underlying issue that DOGE was created to address, which is federal debt sustainability. And again, this issue that we have this crossover point coming in less than a decade at least at this point.

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A bar graph on the left shows G,A,O estimates of improper payments by agencies with a pie graph on the right showing improper payment estimates by program, fiscal year 2023. Source. US Government Accountability Office, March 2024

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And the General Accounting Office does cite-- it's interesting that they can compute this. They estimate around $200 to $250 billion a year in improper federal government payments, so they can identify, after the fact, that $200 to $250 billion a year are spent improperly, but they don't have the systems in place to prevent those payments from being made in advance. And so these are the kinds of things that, efforts-- under the Obama administration, they worked on as well, that they're trying to solve.

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A graph shows net immigration monthly rate with an increase since 2020 of Authorized, permanent residents, students. Unauthorized, illegal entrants, refugees. Source: DHS, CBO, Goldman Sachs, J,P,M,A,M, November 2024

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And then with respect to border security, I think this is helpful context to understand what the administration is doing. For about 15 to 18 years, there was about a million people a year of authorized, legal, permanent residence coming in. And another 10% or so, 100,000, 150,000 a year of undocumented workers, or whatever you want to call them. Not getting into that debate. And then, in the Biden administration, those numbers surged, where you had almost 3 million people a year of unauthorized entrants. And so part of what's happening is a response to that. And by the way, the public polling is 50% to 60% in favor of what the administration is doing on immigration and border security. And

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A bar graph shows US-Mexico border Fentanyl seizures increasing to a peak in 2023, then decreasing. Source: Washington Office on Latin America, CBP, February 2025

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they also say they're trying to address the fentanyl flows from Mexico, which have been rising extremely rapidly since around 2018.

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Text: Ideology of the American professoriate, Liberal-to-conservative ratio. A line graph shows a range from 1970 to 2015 with lines for American public steadily below 1, first year college students above 2 in 1975, then dipping to around 1 since 1980. University faculty spikes above 5 in 2010 and then decreases. Source: Samuel J Abrams, Sarah Lawrence College, 2016

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And then the last thing that I would mention that the administration is reacting to is an increased ideological conformity on college campuses. This is a chart from a professor at Sarah Lawrence College, that-- it only goes through 2015. He's updating the numbers for me. But just look at this. The red line is the liberal to conservative ratio of the American public. There's a slightly higher line, which is the liberal to conservative ratio of first year university students. And then that skyrocketing blue line is the liberal to conservative ratio of university faculty. And I don't think that these numbers can inexorably separate from each other before something happens. Now, I'm not in favor of, politically, what's taking place right now, but I just wanted to show you the backdrop.

So you might think that with all these slides, I came here to praise the administration, rather to bury them. That's not quite the case. For investors, there are some issues here. And here, I'm going to go through some of the problems for investors with the way that this administration is trying to solve many of these issues that they've cited.

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A line graph shows Global trade with an increase since 1970. Source: IMF, World Bank, UNCTAD, J,P,M,A,M, 2024

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The first one is, globalization is really well entrenched after 40 years, and it's going to cost money to unwind this. And even with the best of intentions and a scalpel like precision, it would be expensive to unwind this, because this has been essentially a windfall for investors through higher profits, and it's been a windfall for consumers in the form of lower import prices. And it's been painful for manufacturing communities who suffered the brunt of that. So dismantling parts of this is going to be expensive for consumers, and it's going to take a hit on profits.

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A bar graph shows market valuation percentile vs history from 1990 to 2005. Source: Bloomberg, J,P,M,A,M, December 31. 2024

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The other thing that the administration has had to deal with is-- they haven't said as much, and they refused to say as much, but they inherited a stable economy with declining inflation expectations, plenty of liquidity, and very high equity valuations. And this is a chart that shows the percentile of all the different cuts you could do on different valuation metrics for the US equity markets. And many of the valuation measures were between the 90th and 100th percentiles of valuation. So there wasn't room for error here.

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Shows a line graph. Text: Regions as a share of MSCI World market capitalization Percent of total MSCI World market capitalization. Source: Bloomberg. J,P,M,A,M, March 14, 2025

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And on top of that, what's happening now is coming after a period of really exceptional US equity market outperformance. Around 15 years, the US has been crushing Europe and Japan for many of our clients. That's been one of the mainstays of our asset allocation recommendation. And even with the minor underperformance that's taken place this year, you can see these gaps are incredibly wide. And so to upset the apple cart at a time of very high valuations and extended US outperformance is going to be volatile for investors.

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A line graph appears. Text: Average tariff rate on all US imports. The range shows 1900 to 2025.

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And so now let's look at the tariff issue. Assuming they stick-- and they may not. They'd be gone tomorrow. But assuming these tariffs stick, we're back to 1950 levels, or pre-1950 levels. They're most likely to be inflationary, although not all of them with 100% certainty. And I thought it was notable that Lutnick has begun to say tariffs are worth it, even if they trigger a recession. Besson's been out saying that US consumers don't have an entitlement to cheap Chinese goods. It's an indication of the fact that the cabinet members are now accepting the permanence of some of these tariffs and are trying to get the American public to accept them.

Here you can see a chart on the average tariff rate on all US imports going back to around 1900. Remember, those were the McKinley tariffs. And the inflation that resulted from them ended up crushing the Republicans in the midterms. They lost 100 seats in the 1890 midterms, and it was the third largest loss ever. But here you can see various overlays of where we are now and what tariffs could go to. And I believe the next shoe to drop in early April will be the reciprocal tariffs. I don't know exactly how they're going to compute it. I don't know whether there's going to be carve outs or offsets. We'll see. But between the reciprocal tariffs and the tariff retaliations, we're moving into unprecedented territory, at least from a post-war perspective. And the sectors that are most exposed to retaliation are things like aircraft, machinery and parts, semiconductor manufacturing equipment, oilseed farming, plastics, resins, inorganic chemicals. These are the things where at least 25% of US production is dedicated to export rather than domestic consumption.

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Text: What does the US government spend money on? % of GDP, with ratio of entitlement to non-defense discretionary. The range is 1965 to 2035 with a line for non-defense discretionary spending that is below 3% in 2025 and a line showing a consistent increase in entitlement spending to around 14%. Source: CBO, J,P,M,A,M, 2025. Dots are CBO projections

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So I understand why they want to do something about the crossover point on the debt. I just don't think that cutting non-defense discretionary programs, like USAID, and firing 100,000 federal workers is going to get you a lot of bang for the buck. It may get you a lot more chaos and disruption than it's worth. And those things are minor in the scheme of things relative to entitlement, spending and interest on the debt. And here is a chart that I've shown before. It starts in the beginning, at the end of the 1960s, when the entitlement system was created. At the time, entitlements had a one to one relationship with non-defense discretionary spending, which is all the stuff the government spends money on that helps generate growth and productivity. And ever since then, like clockwork, these numbers-- the entitlement spending ratio has been rising relative to non-defense discretionary spending, of which there's just not that much left to cut. So I think DOGE is working on a lot of third derivative distractions that aren't really worth it.

So here's the part-- I need everybody to just settle in. Here's the part of the discussion where I want to address the real critical issue for investors. And these are two different questions, which is-- and I'm referring to the people in the administration implementing and coming up with these policies. Are these people serious? And are these serious people? I think we know the answer to the first question is yes. These people are very serious. They've done their homework. They clearly understand the Administrative Procedures Act. The approaches that they've taken to do certain things are being challenged in court, but I expect them to win more often than they lose, even though there is a decision recently that a lot of those probationary employees that were fired are going to be sent back to work, at least for now.

But the second question is the one that's really important for investors, because it has to do with valuations and multiples and predictability. And the question is, are these serious people? And I'm not sure that the answer is yes. And I want to show you why in about five slides.

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A graph at left shows US semiconductor reliance on Taiwan. One at right shows Chinese semiconductors in critical US military platforms

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So are these serious people? Trump has said the CHIPs Act is a horrible, horrible thing. OK? Is that a serious statement? The US-- as you can see, there's a chart here on the left that looks at US semiconductor reliance on Taiwan. You can cut it different ways. You can look at all chips. You could look at memory chips. You can look at logic chips. The last bar looks at advanced logic chips, including indirect flows. The US is 90% reliant on Taiwan.

And so the CHIPs bill, which was a bipartisan effort, or at least partially bipartisan, was the first step in decades to try to repatriate some semiconductor production back in US soil. And it's in Arizona, and it's taking a while to build. And the labor costs are high. But you got to start someplace. The chart on the right is the number, in thousands of Chinese semiconductors in US critical military platforms. So when you look at the backdrop here, there may be things you want to change about the CHIPs Act, but to simply come out and say it was a horrible, horrible thing flies in the face of this critical national security issue. Chip company executives are reportedly already calling their lawyers to assess whether the administration can terminate signed contracts, and the Commerce Department has laid off around a third of the chief office employees. So if this is the direction this is going, I'm not sure serious people would do this.

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Graphs show trade deficits by country and trade balance with Canada.

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Next issue. And this is on the issue of Canada, where Trump has said we're subsidizing Canada to the tune of $200 billion a year. This can't continue. The only thing that makes sense is for Canada to become our cherished 51st state. OK, after I read that long tweet on Truth Social, I picked myself up off the floor, and then I started to look at the actual numbers.

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The trade deficit for Canada, as shown on the graft on the left, is around 3%.

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And Canada actually represents, as you can see on the left, one of the smallest components of the US trade deficit. And despite it being one of the largest trading partners with the US, the implication being that the terms of trade on a bilateral basis are fair, and the US actually runs a trade surplus with Canada, once you remove energy. And look, the issue with energy is, produce more of it as you can. But Canada sells us oil and critical minerals and zinc and tellurium and nickel and vanadium. And energy and critical minerals purchased from Canada by the US is a deliberate strategy by the US to reduce reliance on where we used to get those things, which is China and the Middle East. And so the notion that somehow bilateral energy deficits with Canada represent subsidies, it makes no sense economically. It makes no sense politically. And it doesn't even make any sense geologically. And so I'm not sure that serious people would say this.

On DOGE. I mean, again, everybody I think that I've talked to understands the need for eliminating fraud, waste, and cutting certain government programs. But what's come out of DOGE recently? Massive amounts of misinformation on this whole Social Security payment to debt people issue. We had a link in the prior Eye on the Market through it. The Boston College Center for retirement research debunked all of those issues. There have been calls from DOGE people to impeach judges when DOGE actions were judicially reversed. I'm not sure that a serious person would do that. The DOGE website reports of its savings are riddled with errors and constantly changing, and now the website is taking steps to make some of its errors harder to find. And just as an example, DOGE fired and then rehired 350 people at the National Nuclear Security Administration, including people who assemble and reassemble nuclear warheads. Right? Not a serious thing.

Then is a strategic crypto reserve-- is that really what the country needs right now, given all the challenges that it's facing? Or is that simply a reward to the sector that contributed the most across all the sectors to the President's re-election campaign? Citibank, recently, was instructed to freeze accounts for Habitat for Humanity, United Way, and the New York Department of Taxation and Finance, because they were recipients of green energy grants from the EPA, and they're now being investigated for possible fraud. There was a directive to Columbia University to put the Middle East and African Studies Department into receivership. And then, recently, some European tourists to the United States were detained by ICE, held for several weeks, and then deported. I'm not sure that's great for tourism into the United States. And the Trump administration is also talking about, I read this morning, altering the computation of GDP in ways that it considers more favorable. So I'm not sure serious people would be doing these things.

And then on science and medical leadership, some of the decisions to cut funding to the NIH could affect US science primacy for generations. When I first saw that indirect costs were, on average, 60% of direct costs, I asked the same questions the Trump administration did. Gee, those indirect costs seem kind of high. But the immediate response of cutting grants and funding seems like an extreme and an overly cautious reaction to that. The NIH has already stopped issuing new awards and has begun withholding funds from grants that had already been awarded. And just as a reminder, the NIH has supported 99% of all the drugs approved by the FDA from 2020 to 2019, and nearly all major medical breakthroughs over the last few decades, including treatments for chronic pain, autoimmune diseases, GLP weight loss drugs, melanoma treatments, mRNA vaccines, cervical cancer, you name it.

And then, as it relates to RFK Jr, a lot of how I feel about that. He said studies have found that vitamin A can dramatically reduce measles mortality. Here's the thing about RFK, where I question if he's a serious person. Most of his factoids have kernels of truth in them, which then aren't applicable to the thing that's being discussed. And this is a perfect example, because vitamin A supplements can reduce the mortality risk of measles, but mostly in low countries where a lot of people have vitamin A deficiencies in the first place. In the US, only 0.3% of all people are vitamin A deficient, which is why studies of OECD countries show no benefit for vitamin A in measles outbreaks. So I'm one of those people that was-- I was born in 1962. So I'm one of those people where the MMR vaccine may have fading efficacy, but I have a certain condition where I can't take live vaccines. So I'm actually at risk of having a fading efficacy of my initial MMR vaccine, but I'm unable to get a new one. And so if there's a measles outbreak and I get sick, I know exactly who to blame.

So here's another one.

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A bar graph on the left shows, text: US big pharma taxes paid. Companies: Abbvie, Pfizer, Eli Lilly, Johnson & Johnson, Merck, Bristol Meyers Squibb, Amgen. US tax paid is below zero with foreign tax paid 2022 to 2024, $30 billion

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A lot of people are upset about the chart on the left, and I understand why. These are the seven largest pharma companies. And what you can see is the US taxes they paid versus the foreign taxes they paid. And so this is one of the things where people say, that's why we need tariffs, because US companies are gaming the system. Are US pharma companies gaming the system by shifting profits offshore? Yes. But when did they start doing that?

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A line graph on the right shows, text: US pharma trade deficit

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As you can see on the right, they started doing it after Trump's own tax bill was passed, based on a low, highly favorable tax on international intangible income. And so the US pharma trade deficit didn't start skyrocketing out of control until the 2017 tax bill. Solving it by just putting tariffs on the entire pharmaceutical industry is not a serious way of trying to fix this problem.

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A table shows Actions on the left and Status in Federal District Court on the right

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And then, over the last 72 hours, we've had this-- executive orders with respect to law firms whose partners participated in Trump prosecutions or investigations. Perkins Coie, Paul Weiss, Covington and Burling. and what I've listed here is a bunch of the components within those executive orders. So far, five of them have been challenged, and a judge has granted a temporary restraining order. But when you read some of the things in these executive orders limiting access of these law firms personnel to enter government buildings, or speak to government employees, or investigating third party contractors to see if they have business with some of these law firms unrelated to their government work. This is not a serious way of dealing with the Justice Department, in my opinion.

And the reason this matters for investors-- you might be saying, why does any of this matter for investors? Here's why.

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Shows a bar graph. Text: US dominance of global commerce relies on predictable rule of law. US share by category. Source: B,I,S, Quarterly Review. December 5, 2022

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The rule of law is an integral part of the global primacy of US Commerce. And this chart is one of the most important charts that I'm always showing investors who are panicked about the dollar as the world's reserve currency. The most important number to look at here is the second bar. The US represents around a quarter of world trade. The US represents a much higher share of cross-border loans, international debt securities, effects transactions, foreign exchange reserve investments by other central banks, trade invoicing, Swift payments, you name it. The United States has a primacy role in global commerce because of its adherence to rule of law. And if the perception of that starts to change, there can be an impact on all of these things-- multiples, portfolio flows, foreign direct investment, and a lot of things that the administration says that they care about. So that's what matters for investors.

All right. Now, for the remainder of the presentation, I want to talk about how the markets are. By the way, nobody wanted to do this present this broadcast with me, and now I think you can see why. We're going to review how the economy is responding, how the markets are responding, and what are some of the pro growth, productivity enhancing policies that the administration may pursue that are still to come that will offset some of the negative stuff they've been doing so far.

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A line graph appears, text: Dallas Fed US Weekly Economic Index, Index composed of 10 series including unemployment claims, retail sales, fuel sales, utility output)

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Well, first, it's really important to point out that this is my preferred high frequency indicator of the economy. It comes from the Dallas Fed, and it's got retail sales, fuel sales, electricity output, unemployment claims. And it's very stable. And if anything, it's actually kind of ticking up. So contemporaneous, real time measures of US growth still look good. What's changing is a rapid shift in some of the leading indicators, some of which are surveys and could reverse. But I just want to show you what they are.

(DESCRIPTION)

A line graph appears on the left, text: I S M Surveys, prices paid, with one on the right, text: US medium and long term inflation expectation surveys. Source: Source: Bloomberg. J,P,M,A,M, February 2025

(SPEECH)

I think the first leading indicator we need to talk about is inflation expectations, because this is what puts the Fed in a box. Which is, if growth weakens at the same time that inflation expectations are going up, that's difficult if you're in charge of monetary policy. On the left, you can see surveys of prices paid in both the manufacturing and services sector. Again, to be clear, nowhere near the surge that took place during the Bidenflation period of 2021, 2022. But those numbers are starting to rise again. And then on the right, some of the University of Michigan and New York Fed surveys of medium term and long term inflation expectations. The short term ones are rising, but now some of the medium term inflation expectations are rising too.

(DESCRIPTION)

Text: Producer price inflation intermediate inputs to stage 3 goods producers Index. A line graph shows a range of 2010 to 2024 with increments of 90 to 150 on the y axis. 2010 is at 90 with a spine beginning in 2020 from about 95 to 150 in 2022, decreasing by 2024 to 130 and beginning to rise again. Source: F,R,E,D, J,P,M,A,M, February 2025

(SPEECH)

And some important, actual measures of inflation are starting to tick up. This one looks at the producer price report, and digs in, and looks at what's called stage three producers who buy intermediate inputs that are affected by tariffs. And maybe some of this is just people buying in advance of tariff imposition. But these stage three goods are plastic bottles, rubber hoses, tires, concrete, structural steel, motor vehicle parts, wiring devices. So you can see that these stage three input costs are beginning to go up again.

(DESCRIPTION)

Line graphs show University of Michigan consumer sentiment and expected change in employment over next year

(SPEECH)

How are consumers responding? I tend to not get too carried away with this kind of stuff, because they tend not to be great leading indicators of what happens to equity markets and credit markets. But I did want to show you that consumer sentiment has rolled over. And then on the right, one of the questions in the University of Michigan sentiment survey is, what do you expect to happen in the unemployment rate over the next year? And that number has imploded to one of the worst observations on record since 1990. So consumers, households are expecting a real implosion in the job market. We'll see. So far, the job markets are pretty stable.

(DESCRIPTION)

A bar graph appears on the left, text: I S M New orders less inventories, and on the right, text: Small business capex plans. Source: Bloomberg, J,P,M,A,M, February 28, 2025

(SPEECH)

My favorite leading indicator, and it's my favorite because it's the one that has the closest relationship with what equity markets do next, was rising recently and then just rolled over. And it's the New Orders, Less Inventories component of the ISM. And so for people that follow this kind of stuff, it makes sense. What are companies doing in terms of their order books for the orders that they're getting for new equipment and the orders they're putting in for purchasing new equipment, less the inventory accumulation that they're doing? And that number is rolled over. And then, as you can see on the right, the NFIB small business survey, perception of future capital spending plans surged after the election. But then that optimism has cratered again to one of the lowest levels on record.

(DESCRIPTION)

Text: US vs global equity total returns. Shows a line graph from July 31, 2024 to February 28, 2025

(SPEECH)

And then, what's been happening in the actual equity markets? Well, we've had a relief rally since last Friday. The S&P corrected by around 10%, recovered 2% or 3%. The US has been underperforming the rest of the global equity markets. And then there's been a much bigger correction in the Mag Seven stocks. And just to touch on that a little bit, here is a valuation chart.

(DESCRIPTION)

Text: US equity valuations, Forward P/E ratio. Source: Bloomberg, J,P,M,A,M, March 17, 2025

(SPEECH)

And so for investors, this is actually interesting, right? Because if you look at that gold line, the Mag Seven PE ratios have gone way down. So for people deploying money, at least since 2018, this is one of the lowest valuation environments, if you believe the forward earnings projections. And then the S&P x the Mag Seven has corrected modestly compared to where we've been.

I think there's more to come here, obviously, but Trump's Department of Justice filed a brief arguing that Google should be forced to divest of Chrome, and also no longer be able to make their default search engine payments to Apple and things like that. That may be negatively affecting sentiment. But one of the biggest issues facing the Mag Seven stocks is what's happening with Tesla. The JP Morgan Investment bank is forecasting another 50% decline in the stock, just $120 a share. That was a report that they issued last week. And then I've shown here on the page, there are some ferocious sales declines outside the United States for Tesla, looking at January and February sales. Down 70% in Australia, 70-something percent in Germany, 50% in China, 40% to 50% in Scandinavia, 25% in France. This is kind of a global shadenfreude reaction to what Musk has been up to. And then down 11% in the US. So that's been an issue for Tesla as well.

(DESCRIPTION)

Text: 10 Year Treasury yield change after the first Fed cut. Shows a line graph. Source: Bloomberg, J,P,M,A,M, March 17, 2025

(SPEECH)

A lot of the questions we get, obviously, is about what's happening with policy rates, and then what's happening with 10 year interest rates. This chart is important to understand. There's only been about seven cycles in which the Fed has eased over the last 30 years. And almost every time the Fed eases, you start the clock. And then the 10 year either stays flat or goes down. This time, the 10 year started to rise, and it started rising around the time that it became clear that Trump was likely to win the election. This was a barometer, in my opinion, that the markets were expecting inflationary policies out of the administration.

And I still think that's the case. We still have a 10 year that's around 1% higher than it was since the Fed's first cut. We may end up with lower rates on the 10 year, but in the beginning of the year, the market perception was, you could get a growth and productivity surge that would allow rates to go down in a strong environment. I no longer think that's the case. We're going to have rates of 4.5% to 5% And the only reason that rates go below 4% is if you have a growth collapse. So that kind of benign decline in rates, I think, is off the table right now.

(DESCRIPTION)

Text: High yield BB/B credit spreads, basis points. A line graph shows 2015 to 2025 on the x axis with values of 200 to 700 on the y axis. 2025 dipped below 300 and has increased slightly. Source: Bloomberg, J,P,M,A,M, March 17, 2025

(SPEECH)

And high yield spreads are starting to rise, but from very low levels. And I wouldn't describe the increase in high yield spreads as particularly problematic right now. They have risen to just 300 basis points for BB and single B spreads, which I don't think is anywhere near fair value. But as a response to what's going on, this is a rather tepid response. And one of the reasons is that default rates in high yield and leveraged loans and private credit are still running at very low rates of around 2%.

(DESCRIPTION)

Text: Europe P/E discount vs US. Shows a line graph that measures from 2006 to 2024 with a line for Bloomberg and one for Data stream

(SPEECH)

And Europe's been outperforming the US so far this year, but not by more than it has in recent years, where every once in a while, Europe will outperform the US by 10% or so, and then roll over again. Now, what's happening here, this time around, is a little more interesting. You're seeing a move towards more European stimulus and things like that. But I would rather take my chances outside the US in places like Japan, where there are some interesting corporate governance changes going on, than in Europe. But that said, the US-- this chart is on the PE discount of Europe versus the US. And Europe, even after it's outperformed this year, is still trading at a 35% PE discount to the US, which is kind of remarkable.

So let me close with, what are the pro growth productivity enhancing policies of the administration that everyone thought were going to be rolled out contemporaneously with the tariffs, that would eventually make investors and profits and multiples react positively? So let's talk through those.

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Text: Cumulative number of economically significant rules. A line graph shows representations for Reagan, GW Bush, GHW Bush, Clinton, Obama, Trump and Biden. Source: GWU Regulatory Studies Center, February 2025

(SPEECH)

One of them is the pace of government regulation. And that takes time. And the impacts are long dated. The pace of government regulation obviously should slow. This is a chart on economically significant rules by presidency. Trump was on a low. GOP like path, until COVID hit. And then in the beginning of 2020, obviously, all of a sudden, there were all sorts of COVID related regulations that took place. But Trump, during his first administration, was on track to be a low regulation president. And I fully expect that to be the case here as well. Why wouldn't it be? They're dismantling a lot of the entities that do regulating in the first place.

On this one, I do want to mention, there was a study that came out from Yale's Budget Lab yesterday about how the Trump administration might want to cut headcount at the IRS. So if the IRS shrinks by 50%, which is a workforce decrease of about 50,000 people, Yale Budget Lab estimates that this could result in a $400 billion forgone revenue over the next 10 year budget window. And if the lack of IRS resources leads to a substantial increase in non-compliance, which is tax evasion, the numbers could be much higher than that. So something to keep an eye on.

(DESCRIPTION)

Text: Projected increase in Category 1 and 2 US bank risk weighted assets due to proposed Basel rules. A graph appears with Standardized Approach, Advanced Approach, and Basel 3 Proposal. Source: Morgan Stanley, Oliver Wyman, November 2023

(SPEECH)

The Basel III project will probably be abandoned. Certainly, I don't think this administration has mentioned anything they want to do to support it. That could boost the credit supply as banks reduce accumulated capital. So if I could just explain for a minute, the Basel III proposal would have required the big banks, the category 1 and 2 banks, to increase their capital by about $2 trillion. And in advance of Basel III being implemented, a lot of banks began to accumulate the necessary capital to do that. If Basel III is now dead, presumably that capital would flow back out into the economy, and terms and conditions on credit would loosen, which could help growth.

(DESCRIPTION)

Text: US Share of inward global Foreign Direct Investment (FDI). Shows a line graph. Source: U,N,C,T,A,D, J,P,M,A,M, 2024

(SPEECH)

I think Trump will continue to negotiate deals with other countries to avoid tariffs if they make sufficient foreign direct investments in the US. That would be helpful. In other words, more examples of the deal that was struck with TSMC to start investing in US semiconductor production. You can see in Trump's first term, there was a surge in the inward share of global foreign direct investment in the United States. And then again, during the period of the post COVID focus on domestic resiliency. So more of those deals would help.

(DESCRIPTION)

A pie graph shows European weapons spending by origin since 2022. US value is 62%. Source: Non-English writing, J,P,M,A,M, September 2023

(SPEECH)

There is a lot of discussion now about European rearmament, which is being imposed on them, essentially, by the United States. If it happens, that would be an indirect benefit to US Defense contractors, at least insofar as we can tell. If you look at European weapons spending since 2022, more than half of it went to US Defense contractors. So if they continue to rearm as much, as they may try to spend a lot of that money domestically, they, I think, would be required to spend some of that money with US Defense contractors, simply because they don't have all the products and services and procurement equipment that would be needed.

(DESCRIPTION)

A graph appears. Text: US production of crude oil, natural gas and natural gas liquids

(SPEECH)

I think a lot of people are familiar with the administration's view on oil and gas production. Although if you look at crude oil, natural gas, and NGL production, it went to an all time high under the Biden administration. The Biden administration was not about sticks against the oil and gas industry. They were focused on incentives for the renewable industry, to the tune of anywhere from $1 to $2 trillion, depending upon how you compute that. But they weren't as restrictive in terms of actual oil and gas production as people sometimes think, which is why Besson's target is only a 5% to 7% increase in overall fossil fuel production, compared to current levels. And since some of that's going to end up exported through LNG relationships, I don't see how much benefit that's going to have in terms of reducing energy costs.

(DESCRIPTION)

Text: US transmission line and pipeline growth

(SPEECH)

Now, this will be interesting. If they can do this, I would really kind of tip my hat to the administration. Over the last few years, it's gotten close to impossible to build transmission for renewable projects or pipelines for oil and gas projects. And the Trump administration says they're focused on permitting reform. If they can get that done, that would be impressive. I'm going to watch this chart on pipeline growth and transmission line growth, and we'll see what happens. That's kind of a long dated benefit. But these are the kind of things the administration says they're going to focus on, which would be growth enhancing if they could get them done.

(DESCRIPTION)

Text: Budget reconciliation bill, exploring the policy options. Shows a chart.

(SPEECH)

And as it relates to the stimulus bill, this is a brutally complicated chart. So I'm not going to walk through it. I'm simply going to say that even if they can get this reconciliation bill passed, extending tax cuts is not stimulus. And that's all they're really trying to do, is pass a reconciliation bill, which will extend the personal and corporate tax cuts that were embedded in the 2017 bill. And everything else outside of that is reshuffling the deck. And this is one iteration. The bill hasn't passed, but this is one iteration that we've written about recently. And what's going on in this chart is, they would aim to cut about $800 billion for Medicaid, get rid of the Biden student loan forgiveness, and at the same time that they would increase the SALT cap, they would claw back about $500 billion from Biden's energy bill, mostly EV charging other EV projects, and a little bit of a clawback on the wind and solar ITC, PTC incentives. They would want to have no income tax on tips, some manufacturing incentives, maybe no taxes on overtime, an increase in Homeland Security. But most of this is just deck shuffling with a modest increase in the deficit compared to the CBO baseline.

So wrapping up, I think we titled this presentation Chaos Versus Grand Design. I think chaos has part of the grand design. There's a deliberate amount of chaos in this grand design that investors are going to have to get used to, and which credit spreads and PE multiples and valuations of real estate and cross-border capital flows will eventually start to reflect as well. So what do we have here? I think we have a growth slowdown. JP Morgan's investment banking economists have already started to publish on that. I think we get a growth slowdown, but no recession. The economic consequences of some of this chaos are hard to predict. Remember, the tariff rates are now going back to before most of us on this call were born. I do think there's another shoe to drop with the imposition of some kind of reciprocal tariff. A big issue is whether or not the administration includes VAT taxes in Europe as part of that reciprocity.

But just to be clear, corrections like we've had are not uncommon. Over the last 100 years, A 10% correction like the one we've had happened more than half the time. It happened in 60% of all the years. And a 15% correction happened 40% of the time. And in years with those 10% to 20% corrections, full stock market returns have still averaged 15%. So the fact that a correction is taking place doesn't necessarily tell you that the full year returns are problematic, or there's more bad news to come. I personally think a 15% decline from the peak levels, which is about 5,200 on the S&P, would be a clearer sign of capitulation. I'd also like to see high yield credit spreads go above 400 basis points. Those are the kind of things that would make me, personally, feel more comfortable advising investors to take some of their spare liquidity and put it to work.

And the other thing as I have been a stronger advocate for a US-centric portfolio than almost anybody on the buy side in the industry, but the US is around 63% of a global diversified equity portfolio, if you believe the MSCI weights. If you're 85% plus, I would consider some rebalancing at this point, because I think that the administration, oddly enough, with its America First agenda, that may not translate into America first outperformance in the equity markets.

And then one last comment. We've written a lot about how the hyperscalers may have overspent in the near term relative to demand for compute infrastructure, but the productivity benefits for the corporate sector from AI adoption should gradually start to show up in earnings. I do believe there's more substance to that than the last round of stuff we had with hydrogen and the metaverse and things like that. I do think that there are some real productivity and earnings benefits that come from AI adoption, that could partially offset some of the costs related to a higher tariff world.

(DESCRIPTION)

Shows a line graph. Text: S&P 500 valuations vs returns on equity, Consensus toward 12 month price to book ratio. Source: Factset, J,P,M,A,M, February 12, 2025

(SPEECH)

The next project that we're all going to work on, on my team, is health care. And as you can see in this very messy chart, this looks at consensus forward return on equity on the x-axis, relative to price to book ratios on the y-axis. Bottom line is that most of these things tend to move together. Valuations tend to go up as you make more money. But the cheapest sectors on this chart are health care providers, the overall health care sector, large cap pharma, and biotech. And it's going to require us to do some deciphering of how this administration is going to deal with its ability to have Medicaid and Medicare CMS renegotiating the price of non generic drugs.

So anyway, that's our next project. Thank you all very much for dialing in. I hope there was something that was triggering and offensive to just about everybody. And I appreciate your continued following of our investment research. That's all for today. Bye.

(DESCRIPTION)

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Copyright 2025, JP Morgan Chase & Co, All rights reserved. JP Morgan Private Bank. KEY RISKS: This material is for information 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.

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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.

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