Revisiting our 2025 Outlook: Building on strength

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Jakeob Manoukian: Hello. My name is Jakeob Manoukian. Thank you for taking the time to join me and my colleagues, Steve Parker and Kristin Kallergis-Rowland. We want to spend the next 30 minutes recapping what has happened in markets, both public and private so far this year, and checking in on the expectations that we laid out in our outlook that we published in November. Ultimately, we hope you leave this call feeling both informed about the macro and market environment, and more importantly empowered to make any changes that you might have to make to your portfolio to help you stick with your plan.

 So in setting up the environment that we've seen so far in the first quarter, a helpful framework that we think might be useful for the rest of this call is expectations versus reality. In December and January expectations were very high, valuations were elevated, there was hope that we would get this surge of deregulation and capital market activity, expectations were for US assets to continue outperforming their global peers. And there was also this expectation that bond yields would keep rising on sustained government deficits and further tax cuts, but really we've seen bond yields lower year to date.

So Steve, I'll start with you. Can you just help walk us through the macroeconomic landscape, the market environment, what's happened this year and why?

Steve Parker: Yes, I mean, to your point, you know, one of my favorite investment adages is this idea that markets don't move on good or bad, but they move on better or worse. And as you said, we came into this year with a consensus view that we'll see a continuation of recent strength led by the US tech sector, led by that pro-growth policy that you referred to.

This meant that the bar was very high especially after two years of 25-plus percent returns in US equity markets. We saw this in valuations. We saw this in sentiment. We saw this in positioning. And while investors acknowledged some of these risks, the view was that fundamental momentum would continue to carry the day. Now what we've seen is a few small areas of stumble. Those higher expectations, particularly in the US and particularly in the tech sector, have disappointed on the margin. That's more of a sentiment story than it is a fundamental change to the outlook which is important.

But the good news is, despite the headlines about the sell-off in US equity markets, diversification is back. If you look at non-US equity markets as an example, the bar was much lower coming into this year, valuations were lower, expectations were lower. And as a result, some positive surprises related to stimulus in places like Europe and China has translated into really good performance results.

European stocks have outperformed the US by more than 15% this year, and done what most investors thought was impossible which is to go up when US markets were actually down. You also touched on fixed income. For all of the, hand-wringing in recent years about bonds and whether they continue to be a diversifier within portfolios, we've seen very clearly this year that that continues to be the case especially when the concern in markets is about growth rather than inflation.

Jakeob Manoukian: Yes, absolutely. And then - so the key takeaway for me is that diversification is working. We want to be global investors. And we want to really rely on fixed income to be that kind of ballast to a portfolio. But before we get carried away just some stats to level set, the S&P 500 is down something like 3%, the Magnificent 7, which was the real leadership sector over the last couple of years, is down over 13%. But to your point, the MSCI World, which is a global benchmark is flat. And a 60/40 portfolio is even up slightly on the year. So I think investors can take solace in that.

 So public markets have seen a lot of that volatility, and of course they have they mark to market every second of every day. But in the private markets too I think there's been this dichotomy between expectations and reality. The kind of surge in deal-making and capital market activity may have - it may be delayed, maybe it will fail to materialize, but what are we seeing in private markets so far this year?

Kristin Kallergis-Rowland: Yes, I do think that they will materialize. I do think the same reasons why there's hesitancy in the public markets is why there's hesitancy in the private side. But if you can just keep a company private, keep chugging along, try to really focus on driving operational value with these companies to make it an attractive asset for an exit, I definitely think that's still there. I think whether, you know, it's a matter of weeks or months away from getting more of that certainty, the same factors apply.

What I would say is on the private markets, what we've gotten used to over the last two to three years, is the lack of exit activity has drawn people to things like the secondary market or drawn things that - drawn folks to things like continuation vehicles. But I would say fundamentally the things that are exiting are those that were well-operated assets that have high growth potential, like the medium asset really doesn't have a place to go right now, I think that stays persistent.

We also think that in private equity markets the last decade has been - almost 50% of returns of the industry came from multiple expansion. We don't expect that going forward. So where we're focused is really on driving operational strategic decently growing assets on a go forward basis. And when we do see some deregulation we do think that's an area where you're going to see more exit activity to start versus anywhere else.

Jakeob Manoukian: Absolutely. And it's almost a simple equation where you have time keeps marching forward. And there's something like 30,000 private equity portfolio companies that need to be managed.

Kristin Kallergis-Rowland: Yes. And then the point that you made about being a global investor too, there's other parts of the market. Like we're looking at places like Japan. And there's over 3 million SMEs. And when you - and a lot of those are family owned assets.

                             
New corporate governance really came into effect in 2015, that was ten years ago. We're starting to see more deal activity in places outside of the US in what's the third-largest economy in the world. So having sort of that global portfolio has helped us see more of that activity, but in the US alone we certainly need some more volatility dampening from a news perspective...

Jakeob Manoukian: Right.

Kristin Kallergis-Rowland:  ...reducing volatility.

Jakeob Manoukian: Yes, so let's get into that with Steve a little bit. And I want to talk about how we kind of marry the private markets with the public markets...

Kristin Kallergis-Rowland: Right.

Jakeob Manoukian:  ...in the portfolio context a little bit later, but the news has been relentless. A lot of the correction and the sell-off that we've seen in US equity markets is driven by what seems like some pretty drastic shifts in the way US trade policy is organized. So from your perspective, what is driving this correction in US equity markets? And then for maybe investors who are looking to put capital to work...

Steve Parker: Okay.

Jakeob Manoukian: ...what do we need to believe to be able to buy the dip?

Steve Parker: Yes. So, you know, first of all when you look at the US tech sector, which we know has been the leader but also the epicenter of some of the pain, it's a little bit like the A plus student who comes home with a B plus on their test, like, things are still good but relative to expectations, you know, it's been a little bit of a disappointment.

We'll touch on policy in a second, but I think the important piece to remember from an event perspective, the first part of the sell-off really started when we got the news out of DeepSeek. So this idea that out of China we were getting an AI platform that was lower cost, faster to market called into question this idea that the US had the leadership position in all things AI.

And as a result, the hyperscalers, the Mag 7 companies, which had been the big winners on the upside, began to underperform. The good news is that concentration risk that. So many were worried about coming into this year, we're actually seeing that flip a little bit. And in fact, the other 493 in the S&P if you will are actually going to be the beneficiaries, lower cost AI, more scalable technology is better for the broadening concept which was core to our theme. So that was the first piece. That's what led the shift in market leadership.

The second piece of it is really this idea about policy. And so we came into the year with an expectation that policy changes out of D.C. would be focused on pro-growth initiatives, lower taxes, deregulation. In fact, what we're seeing, at least up front, is this focus on tariffs, cost-cutting, turning that policy tailwind into a bit of a headwind.

Jakeob Manoukian: And the interesting thing about the policy choices, at least from the administration, is we hear a lot of focus on the 10-year Treasury yield. And it seems like one of the focuses that they have is kind of incentivizing a little bit more borrowing, a little bit more leverage from the private sector, and a little bit less borrowing from the government sector. So I think, at least from that perspective, maybe they're making some progress or how do you see the kind of policy mix playing out into the second half of this year in 2026?

Steve Parker: Yes, I mean, the good news so far is that a lot of the pain that we've seen in markets is, as I said, more related to sentiment so soft data rather than hard data. So this transition that we're going through hasn't yet played out into the broader economy, that's certainly something that we need to watch.

I think what's important to recognize is, as you said, you know, the areas that we would be most concerned about, the corporate sector, the consumer, the areas that we think are going to drive growth still remain in very good shape. So even as policy uncertainty is on the rise, the fundamental outlook is still one that points us to, you know, a softer growth environment but still a positive growth environment.

Jakeob Manoukian: Right. So if, and what I'm hearing from you is, as long as you believe that the fundamentals in the corporate sector and the household sector are okay, if you believe the kind of historical precedent that spikes in policy uncertainty actually interesting times that add to equities, you can feel pretty good about phasing in here. Is that fair?

Steve Parker: I think that's right. You know, there's a very good chance given that this is more of a sentiment-driven issue than it is a fundamental issue, that we may have already seen a bottom in US equity markets. But we also need the humility to understand that life is not just about a single path in markets but around a range of outcomes. And so one of the things that we think about is, what is the potential path that could take us lower?

If you go back to the Global Financial Crisis, we've had four series of growth scares where we saw markets begin to price in increasing odds of recession, but where we didn't get there. In those cases on average, markets fell by 15% to 20%. So a lot of that historical pain we've already felt. So now is probably the time where, you know, for fully invested clients we feel really good hanging out at normal levels of risk.

For clients who are sitting on elevated levels of cash or who are thinking about phasing into portfolios, we're getting close to that point where you want to be putting some of that capital to work recognizing that the ultimate bottom may not be in but taking that discipline and gradual approach is much better for long term success.

Jakeob Manoukian: Absolutely. And there are other ways than just, you know, buying the equity market outright to add exposure to portfolios. I'm thinking about things like equity-linked structured notes, I'm thinking about opportunities at a subsector level or even a company level, so you don't have to kind of have a binary decision point here.

Steve Parker: That's right. But I also think it's really important to have that shopping list.

Jakeob Manoukian:  Yes.

Kristin Kallergis-Rowland: So one of the things that we always talk about with our portfolio managers is being ready. What are the things that you would want to buy if we get to lower levels, because ultimately things feel really bad when you hit those bottoms in markets, and so you want to be ready to go? And so whether it's using as you said, structures with downside protection to leg into markets or thinking about opportunities and things like financials or technology, you know, now is the time you should be thinking about that discussion.

Jakeob Manoukian: And I want to come back to your - the scenarios that you alluded to just to think through maybe what are we watching in case we're wrong. But it made me think, what are those kind of opportunities that we're seeing in the private markets right now where the, you know, the managers that we work with are kind of circling around either potential distress, or I know real estate was in the news for, you know, the last two years about being a potential area where there's opportunity. How are they thinking through the potential areas that are more opportunistic?

Kristin Kallergis-Rowland:  Well, I would say you're right, real estate is certainly a place that we've been legging into over the last couple quarters. We do think that when you look at the ODCE indexes, a lot of those have bottomed. They've started picking up the last, I think the last two quarters in particular, which has been fantastic.

We do also think real estate is - like a lot of the subsectors of - you can't just say real estate, right...

Jakeob Manoukian: Right.

Kristin Kallergis-Rowland: ...it's within every sector, within every city, with every, you know, office in New York is very different than office in Munich or Paris or wherever it might be. But what I would say is in the real estate market we certainly see continued constrained supply.

The sentiment doesn't help in terms of new construction also. And so there's a lot of things that have allowed us to do a reset in real estate that we feel very good about on a go-forward basis. So I would say real estate returns on a go-forward basis we do think are higher than the past.

If you look at our long-term capital market assumptions which sort of predicts over a ten to 15-year period what every sub-asset class or the range of outcomes might be, real estate is typically in the 7% to 8-1/2% was maybe when I looked back over the last 20 years, that range. And now it's the highest of any subsector, it's over 10%. And so there's certainly an interest in thinking about real estate as part of a portfolio.

On the opportunity to credit side, I think credit in general more folks have focused on direct lending over the...

Jakeob Manoukian: Right.

Kristin Kallergis-Rowland: ...last several years as a way to gather income in portfolios. I would say there's a lot of people that, under the hood of credit, we were just talking about when you look at, you know, high yield's been pretty good over the last couple of years both from a company perspective, a subsector perspective, et cetera. When you look at lev loans, it did surprise me to learn that there's over $80 billion in sort of the distressed zone, whether it's 2/3 of that in areas where companies have spread over 1000 basis points.

Jakeob Manoukian: And that's surprising just because in public markets credit spreads have remained very, very, very tight...

Kristin Kallergis-Rowland: And it feels okay, yes.

Jakeob Manoukian: ...and everything feels okay.

Kristin Kallergis-Rowland: Yes, but I would say there are opportunistic credit managers who are starting to see sort of these opportunities arise at a more micro level than a macro level. But that's I think we forget how large the overall non-investment grade markets become over the last...

Jakeob Manoukian: Right.

Kristin Kallergis-Rowland: ...12 years, 14 years. And so there's still plenty of opportunity on the opportunistic credit side as well.

Jakeob Manoukian:  Absolutely. And I think what we're kind of painting here is this picture that we wrote about in our outlook which is, how do you make a portfolio more resilient, right? How do you generate the returns that you need to meet...

Kristin Kallergis-Rowland: Yes.

Jakeob Manoukian: ...your goals over time by pulling various different levers. And whether that's broad equity markets driving capital appreciation, whether it's using equity linked structure notes to change the volatility profile, whether it's using real estate to have a different return driver that's still in that kind of high single-digit range.

Kristin Kallergis-Rowland: Asset backed, yes.

Jakeob Manoukian: There's a lot - asset-backed, yes, finance. There's a lot of different ways that we can generate those returns.

Kristin Kallergis-Rowland: Yes.

Jakeob Manoukian: ...and that's going to continue to be important in (unintelligible).

Kristin Kallergis-Rowland: Yes, I thought you were going to go there next which was, you know, building that portfolio resiliency which is a lot, you know, that - people are also looking at places like infrastructure...

Jakeob Manoukian: Right.

Kristin Kallergis-Rowland: ...that are also asset backed but are, you know, essential services, utility, power.

Jakeob Manoukian: And have a little inflation protection.

Kristin Kallergis-Rowland: Yes, or even like some people were asking about stagflation, right...

Jakeob Manoukian: Right.

Kristin Kallergis-Rowland: ...thinking about slower growth higher inflation, and a lot of the pass through that you can get within the infrastructure assets and ecosystem has been really essential to returns over the last couple (unintelligible).

Jakeob Manoukian: So let's dig in on that with Steve...

Kristin Kallergis-Rowland: Yes, great.

Jakeob Manoukian: ...because the reason why you need a resilient portfolio is because you can't just invest for one central case...

Kristin Kallergis-Rowland: Totally.

Jakeob Manoukian: ...right? That's how you get a portfolio that's fragile and is exposed to pretty severe drawdown. So when we think about the range of possible outcomes, like, what are we watching to see if our base case is on track? And then what would make us a little bit more nervous about the kind of rest of the year?

Steve Parker: Yes, So again, to reiterate our base case is that we will see a positive growth environment, perhaps slowing a little bit relative to the last couple of years, but that in retrospect this will be more of a growth scare. You know, in that scenario, the upside to our S&P target, as an example, is, you know, high single to low double-digit types of returns between now and the end of the year.

Now, what are the potential, you know, downside scenarios? You know, we talked a little bit about this growth scare idea. So there's a risk that continued policy uncertainty starts to translate from those sentiment surveys into actual corporate action and gets us a little bit of a slowdown. You know, that's a possibility, but as I said a lot of that has already been priced into markets.

The bigger risk is the recession risk. And, you know, you're hearing more and more noise about this policy uncertainty translating into a true slowdown. That historically has been something like a 20% to 30% correction in markets, but we don't see that as a high probability risk. What are we watching, to get back to your question to figure out if that risk is higher, one, and (KK) touched on it a little bit, credit spreads. You know, that is the best real-time indicator around the health of the corporate sector. And thus far, we haven't seen a lot of movement that would indicate great deals of concern from the credit markets.

Two, would be this idea of the translation from softness in the soft data to the hard data. So today, the biggest areas of weakness are around consumer sentiment, you know, corporate sentiment surveys, rather than actual spending data, rather than actual employment data, et cetera. So we want to keep a close eye on whether the hard data, the actual numbers start to slow down.

 And then the third one is really around corporate commentary. So a big part of our positive view on the world is related to the fact that the corporate sector is in very good shape. We expect capital spending to remain robust. We will get earnings season kicking off in about a month, but between now and then we want to keep an ear to the ground on what companies are saying. Are they changing the trajectory of their spending? Are they bringing down expectations? And thus far, we haven't seen that play out in a broad-based way.

Jakeob Manoukian:  And so I'm sure kind of the first quarter earnings report season is going to be very important to kind of parse through how companies are actually dealing with the policy uncertainty and the tariff uncertainty that's in the landscape to just make sure that what we're seeing from a bottoms-up perspective is aligned with our expectations for the environment.

Steve Parker: Yes, that's right. And the good news is we talked at the beginning about, you know, better or worse, you know, what is the level of expectations? With the sell off that we've seen in markets, we have seen some degree of correction from a valuation perspective. In fact, if you look at the Mag 7, which was an area of concern, valuations there relative to the broader market are now at their lowest levels in ten years. So, you know, this is again, going back to what are the risks, and what are the opportunities?

Jakeob Manoukian: Right. So our base case is for a continued expansion, maybe a little bit slower growth than we were penciling in before, you know, sticky inflation, but nothing that's really going to get the Fed to materially shift their policy. But if we're wrong, it seems like we're going to be in an elevated volatility environment.

Kristin Kallergis-Rowland: Yes.

Jakeob Manoukian: And most of your investment portfolios probably enjoys low volatility. I'm thinking about equities. And I'm talking about fixed income, right? The valuation of assets is probably going to be higher if they're less volatile. One kind of asset class or investment option that actually does well when volatility is higher is hedge funds. So I'm interested to hear what are the - what is the case for hedge funds in this environment? And then what are some of the managers that we work with doing?

Kristin Kallergis-Rowland: Well, I know that you know that I hate saying hedge fund. Like, you're right hedge fund...

Jakeob Manoukian: I knew I was going to make you mad. I knew that but you can correct me.

Kristin Kallergis-Rowland: No it's fine. Hedge funds are an instrument not as asset class. And I think it's important only because there's over 10,000 that are out there. We invest in less than 100 of them. What I would say is you're right in a portfolio where correlations have risen together as long as there's not significant spikes in volatility hedge funds over time have done very well in terms of delivering alpha. We went through a period pre-GFC where we saw significant health in the industry. We went through what I call the alpha winter of hedge funds which was 2010 to 2019.

Jakeob Manoukian: More like an ice age.

Kristin Kallergis-Rowland: Since 2020, we've seen alpha come back. Now, what do you have to fundamentally have though, for hedge funds to be able to deliver in a portfolio? And again, I'm speaking broad-based, but when we focus on less correlated return streams within hedge funds, relative value, quant, a little bit of macro, what I would say is that when you have risk-free rates over 2%, when you have increased vol, and when you have increased stock dispersion, that's typically been a good environment from an alpha perspective of hedge funds being able to deliver.

And when you look at the broad - even the broad based industry, even though I just said that we focus on less than 1%, over half of the hedge fund industry has abated a broader market of less than .5. So there's plenty of opportunities to think about it. I would say the uncorrelated return streams is where we're focused. What can you not replicate...

Jakeob Manoukian: Right. 

Kristin Kallergis-Rowland: ...via public markets? And those have done fantastically well.

I also think there's a lot of hedge funds that have become more the market makers in the markets when times of volatility come. And so there's a lot going on there. There's a lot of availability of alpha we think in today's environment because risk free is over two, volatility has increased and stock dispersions also increased.

Jakeob Manoukian: Right. And when you think about what role we're trying to have, the hedge fund industry play in a portfolio...

Kristin Kallergis-Rowland: Yes.

Jakeob Manoukian: ...it used to be that volatility dampener...

Kristin Kallergis-Rowland: Totally.

Jakeob Manoukian: ...to give us a return that's above and beyond what cash can give us without being as correlated to either public equities or public fixed income.

Kristin Kallergis-Rowland: Yes.

Jakeob Manoukian: And we think the landscape sets up well for it to be able to do that.

Kristin Kallergis-Rowland: Yes, I always say it takes the roller coaster of a market to make it a baby roller coaster. If you start at 100, and you're down 50, up 50, you're not back at 100. If you do down 25, up 25, you go from being at 75...

Jakeob Manoukian: Right.

Kristin Kallergis-Rowland:  ...versus 93.75. So even minimizing that roller coaster I think, can help you compound at higher returns.

Jakeob Manoukian: Yes, and minimizing the roller coaster is all portfolios are.

Kristin Kallergis-Rowland: Yes.

Jakeob Manoukian: So, like, we're just trying to add differentiated return streams...

Kristin Kallergis-Rowland: Yes.

Jakeob Manoukian: ...that are less correlated to each other, so that you aren't suffering those really damaging drawbacks in portfolios. Okay, so now we've covered a lot. We've covered a lot of policy backdrop, a lot of the kind of market backdrop, our expectations for the future and the implications. One of the kind of longer term themes that we are really positive on is AI.

You correctly pointed out that the kind of DeepSeek news was the first demarcation line that, oh, maybe this year 2025 is going to be different than what 2023 and 2024 were like. The - I think you said it correctly, less expensive AI that's - creates better output should be better for the global economy and for global companies. One of the ways that we think the AI trade is going to manifest is through the software space, because all of these applications are really just software. So it's interesting, and I'm going to steal a stat from you...

Kristin Kallergis-Rowland: Right.

Jakeob Manoukian: ...but I want you to tell the whole story.

Kristin Kallergis-Rowland: Okay.

Jakeob Manoukian: Is that there's 100,000-ish investable software companies in the world, and 95,000 of them are private.

Kristin Kallergis-Rowland: Yes.

Jakeob Manoukian: So having private exposure to this trend we think is critical, but can you just elucidate a little bit more of why it's so critical to have access to that sleeve of the market?

Kristin Kallergis-Rowland: Yes, I - well, a couple of different things. I do think, you're right, we hit on, part one was like the infrastructure phase, right? And it was a lot of the infrastructure funds building data centers, thinking about that. We've sort of shifted off of that a little bit.

We're still doing - making investments behind some of the data centers, but the DeepSeek the questions about how much, you know, demand is there, who is going to hold the bag in terms of the risk in the end. We've moved into the power side of the equation, how do you actually power these things? That's interesting, but you're right we've moved. Also, we're starting to invest in the application layer.

Jakeob Manoukian: Right.

Kristin Kallergis-Rowland: And so we do think software is the one place. It has very low capex spend. It has non, you know, we focus in particular on enterprise software. That's a place that we really like. And I would also say within software security is one place that we're starting to focus more. I think the market's starting to focus more and more on it. Last week Google announced the acquisition of Wiz a year after the last bid. I think it went from $23 billion to $32 billion a year later.

That tells me two things one, and it was the largest - I think it was the largest acquisition in the security market, maybe ever, but it tells me two things. It tells me, one, people are starting to focus on security. And that was a multi-cloud provider, so that, you know, it's not just about Google themselves. But number two, I do think it's interesting because it's some - it's one of the first things to happen in this new administration.

And so talking about the difference in a year ago versus today, the revenues have only increased to that company, let's say, but a lot of people talk about just the fact that you can now start doing M&A or thinking about that. So applications, software in particular, you just talked about the large percentage of the market that you could only get in private markets, and then the focus on security, I think, are the near-term focus items in AI.

Jakeob Manoukian: Got it. Got it. So we're going to go ahead and wrap up.

Kristin Kallergis-Rowland: Okay.

Jakeob Manoukian: But I just want to think back to the beginning, which is some of those performance statistics that I listed. This week is the five-year anniversary of the market bottom during the COVID crisis, so we have five years of data. Since then, the S&P 500 has returned 175%, which is 22% annualized. The long-term capital markets assumptions say the S&P should do something like 7%.

Kristin Kallergis-Rowland: Yes.

Jakeob Manoukian: So we've been on a really good stretch for the last five years. Magnificent 7 is up over 500%, global equities up over 150%, and a global 60/40 has returned over 70%. So this has been a tremendous stretch for financial markets and for investors.

And when you think about everything the world has been through over the last five years, pandemic, global lockdown, social distancing, sharpest inflation shock in 40 years, sharpest central bank tightening cycle in 40 years, two presidential elections, wars, a mini banking crisis in March 2023 I think it's really a testament to this idea that if you build a portfolio that is designed to achieve your goals over your given time horizon, you need to trust it, and you need to let it work.

So I just want to thank both of you very much for the insights on the individual asset classes. And I want to thank you all again for joining us. In conclusion, this current market landscape is certainly - it feels overwhelming at times, but that requires an active and empowered approach. And we think the most important decision you can make is to get invested and stay invested in a portfolio that's designed for you and for your goals.

And at JPMorgan, we are all here to help. And we just again, appreciate all of the time and all of your confidence in us. So thank you for joining.

Kristin Kallergis-Rowland: Thank you.

Steve Parker: Thanks.

Coordinator: Thank you for joining us. Prior to making financial or investment decisions, you should speak with a qualified professional and your JPMorgan team. This concludes today's Webcast. You may now disconnect.