Tech, Tariffs, and Turbulence: Insights from the CIO

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Good morning, good afternoon, or good evening. Thank you for joining me today, Richard.

My pleasure.

It's great to see you.

As always.

Yes.

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Text: Nancy Rooney, Global Head of Portfolio Advisory Group, J.P. Morgan Private Bank and Wealth Management. Richard Madigan, Chief Investment Officer, J.P. Morgan Private Bank and Wealth Management.

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So we are certainly in interesting times, which brings us together today. I'd like to anchor our conversation a lot around the global economy. And I really want to pause on the word global. And I think what we have seen so far this year fiscally, politically is just how global our supply chains are and certainly our markets are.

And as the CIO of our client portfolios, you have to balance all of that. And you made a big decision earlier this year after being overweight equities, overweight extended credit to pull that risk in. So let's begin there. Let's talk about how you're seeing the macro and what made you want to pull risk in.

So the macro is the right place to start, Nancy. And think back to third quarter into fourth quarter last year. And by the way, continuing into this year, the hard data is incredibly resilient. So growth is strong and stable. We're watching inflation trend lower. We're watching earnings and the strength and resilience of that, same I would say for relative balance sheets. That's why we were overweight risk last year.

We actually began pulling back that overweight in the fourth quarter. But it wasn't a function of anything shifting in the macro scope. It was simply a function of valuations. We thought that equity markets in particular had gotten to a level they were just a little bit ahead of themselves. I think--

So taking profits?

Well, if you want to call it that, yes. But I think just the prudence of didn't feel that we were being paid that extra little bit for taking more risk so we pulled that back in terms of positioning. We changed coming into this year when tariff talks started to heat up.

And I think that drove a large part for me of wanting to pull back a little bit further on risk, because without the commensurate valuation dynamic offering what I thought was fair compensation for the risks and risks on the margin from a macro perspective rising, we wanted to pause and pull back on that. So I think it was just prudent risk-taking.

And so if I were to look forward, you've talked a bit about the tariffs and the uncertainty of all of that. As I think about that sort of risk and valuations, it makes me does pause-- it makes me pause a little on just the concept that some people have hit on around a recession. And it sounds like, from your comments, though, you don't think we're headed into a recession.

I mean, the biggest dynamic or challenge I think to anyone looking forward right now is we don't know where we're going to land on tariffs. So uncertainty is a little bit higher. I think there's greater concern, rising concern of a mix between stagflation and potentially recession. But to answer your question directly, no, that's not my base case.

In any given year, I'd put a 15% chance probability of recession. If you pushed me, I'd probably say today, looking out a year, I'd put that number at 35%, and then maybe add to it 10%, 15% of subtrend but positive growth, which is why we're fully invested in terms of the equity positions that we hold. But we're not overweight.

That's what I was going to ask you. You're still at a full equity position.

Yes.

Yes, just pulling back on the overweight.

Constructive but cautious.

I think that's a good theme actually for this. But I want to spend a minute on the US. And I think with regard to-- you've talked about the valuation dynamic, but certainly what's given rise in all of this volatility is this period of US exceptionalism over. And is this the-- if so, is this the time to start really thinking about outside the US?

I don't believe the exceptionalism dynamic is over. It creates a great narrative. And so I think there's an awful lot of incendiary punditry out there around that. But we're less exceptional. And I'm going to anchor that, I think, much more, again, on the valuation dynamic. It's not a negative observation for me in terms of the corporate sector at large. There are pockets that are pressured. There are pockets that are not.

But that exceptional dynamic led by tech really, I think, continues to be the driver for the resilience of the economy. By the way, I'd add financials in there as well. So those two pieces, just as solid anchors to me, make me feel good about that relative outlook.

Exceptionalism going forward, and if it spreads to Europe and the broader economy, I think it already is. But again, let me bifurcate what got us to the moment of that relative exceptionalism outside of the US. Those markets have lagged for a decade, and so what we've watched is a repricing of relative valuations as the US has come down that they've been paying cloud, paying catch-up on the margin.

And that's incredibly healthy. To me, that shows a dynamic healthy global market, reallocating capital to where it perceives, in certain instances, perhaps a safe harbor, but in other instances, just a valuation gap that it wanted to close. And that's obviously what we've seen in Europe this year.

So that is what I did want to ask you about Europe. And they have meaningfully outperformed the US this year.

Yeah.

And it sounds like what you're saying is that's a little bit more of a rebalanced trade. But what about things that are going on in Europe, structurally, like? We are seeing some record announcements in terms of spending coming out of Germany, and that has the potential to amplify. What about a potential overweight to a place like Europe?

We're not currently, but it's a very de minimis underweight. And it's really a function of portfolio construction, because the things that we're owning in Europe tend to have higher beta. So we have favored global financials, which has been a smart place to be allocating capital, and we continue to believe that's the case.

Especially, as you say, if the ECB continues to lower rates?

Correct. So that dynamic, to me, I feel good about it. So when I think about the ultimate amount of risk, it may look like a pronounced underweight. It's not. But when I beta-adjust the amount of beta for where we're taking it, I kind of feel we're neutral-ish in that allocation.

I think the biggest challenge for everyone selling the narrative of Europe's cheap and to lean in goes back to the conversation we had on the valuation gap between the US. And in my opinion, that's now been closed. So the easy money, if there is, and there never is, I think has been quickly repriced into markets and that's fine around it.

Where we go from here, I think, depends on some of the observations you made in fiscal spending and defense spending where Europe is pivoting. But those are very slow-burn multipliers. So that isn't money that's going to be paratrooped into and spent quickly. It's going to take time.

It'll ameliorate, I think, Europe not being pulled into recession, assuming the US isn't. I think the pause on all of this, and a bit of the narrative that I challenge, is the US is in trouble and going into recession, but everyone else is going to be fine. If we truly watch the US economy in recession, we are going to take everybody along with us for the ride.

And so Europe is less about just a broad beta trait of Europe, but more thinking about what are those areas like financials that potentially could do well in this type of environment?

Correct.

And they certainly have different drivers of European markets than we do in the US, which tends to be so growth and tech-driven?

Yeah. And by the way, it's why we're global investors. I'm happy we can invest in both.

Yeah, so let's bring it back to tech a little bit.

Sure.

So that has been the driver for a long time. And you've been overweight. You've been overweight cloud. You have a number of positions to really focus on AI. And I know we're still just going through earnings right now. But do you think we get back to where we were, from a valuation perspective, which is expensive, right?

Yeah.

Or has the CapEx picture become so murky with all of the tariffs and putting things on hold that we don't see those valuations again?

It's a smile politely, as I said, this is part of the conversation where I say past performance is no guarantee of future performance. But I will say for the valuation levels, we were holding at the high part in big tech. The market was very comfortable with them, but it was comfortable for the right reasons.

We were watching earnings being delivered on strong capital expenditure, investment, innovation. AI tied to that, hyperscalers tied to that. We've played all of those segments. And you pointed out, we've had large overweights to tech, I'm going to say for five years, but it's been longer than that. But it's been very specific on the innovation component and the earnings dynamic, both of which I think continue.

The CapEx question is a little bit more challenging, because I think it's not unique to tech. We're going to watch all corporations globally right now. If you were sitting in a C-suite, you were playing my caution dynamic. So you're going to keep spending, but you're going to target the things that are strategically important and keep putting money into that.

You're likely to slow-hiring. You're likely to slow investment. You probably, at some point, pull back a little bit on buybacks, until there's greater clarity on where we land with tariffs, what the broad implication is around the recession theme. But the underlying current is one where I think most C-suite executives, just like most investors, see more positive in the broad dynamic globally than negative right now.

And it does feel like it's a pause as opposed to a retreat.

I agree with that right now. And we'll see what happens. I think in the next quarter, I hope, we get a little bit better clarity and information on what people should actually be pricing, or more importantly, not pricing in to risk.

We have seen more, especially the mega cap, start to talk about their supply chains, right?

Yes.

And they have to. And you've seen people start to pivot away from China as a result of some of these announcements on the tariff side. And it makes me think a little bit about if I'm not going to produce in China, where else am I going to go? And potentially then does that give a lift to emerging markets? And you have quite a background in emerging markets this year.

The scars to prove it.

Yeah. And from time to time, you have held it in portfolios. And so how do you think about that as a potential opportunity?

Carefully.

Yeah.

EM's been fascinating to me this year because it reflects a lot of the dynamism that we've seen in Europe as well. You're watching, in the US, front loading of imports ahead of tariffs. When people got a sense of how assertive the tariff approach is currently from the White House, they hit all go and tried to get as much in as quickly as they could. And I can put hardware manufacturers, I can put tech in there. I can keep expanding it. By the way. I can put agriculture as well.

So Europe certainly benefited from that. So did emerging markets and Asian emerging markets. So that's really been the driver in terms of the bump that we've seen. So EM has outperformed the US year to date. It's underperformed the US on a one-year, on a three-year, on a five-year on a 10-year basis. So there are moments where leaning into those markets--

Which is not what portfolio construction would have told you.

It's also not the narrative out on the market.

That's right.

But it's the lack of dynamism and growth, anemic growth, challenging domestic markets that just never offered the opportunity and the upside in sustainable consistent earnings growth. And I'm speaking holistically for emerging markets, which is unfair because there are all sorts of idiosyncratic opportunities in specific countries, in specific companies, which we've taken advantage of.

I mean, I always pause laughing, calling Taiwan or South Korea an emerging market. I don't view them as that, but we've certainly had investments and continue to hold them there.

What about the debt side of things? How do you think about emerging markets debt, especially for global investors?

We own it. We owned more of it last year, so we've been pulling it back for the reasons we've talked about in terms of broad risk taking right now. But it's been a wonderful risk diversifier for the credit positions that we hold in the US, also in pan-European credit markets. So that diversification of risk has actually helped smooth the ride and balance out some of the underlying volatility.

And I'm looking at yields that are still incredibly attractive. So to me, I can put a very high probability if I have an informed view on default risk for what I own on how much of that yield I will be able to put in with the carry to our portfolios for total return.

So you're not worried about default, and it's basically a carry trade?

I was going to kid you. I'm always worried about default but not for the things that we happen to own in the portfolios.

OK, but it's a carry trade?

Yes, absolutely.

OK, so it wouldn't be a fulsome conversation if we didn't talk about the Fed. So we got to do that. But the Fed appears to be on hold for the time being. And I think we came into the year with a lot of people expecting a whole series of cuts.

Yes.

And some of that has been pared back.

Yeah.

But do you think cuts are still off the table for this year?

Oh, it's a really hard question for how you asked it. Do I think they're off the table for now? Absolutely if I was sitting at the Fed, there is no first mover advantage, raising rates or cutting rates right now. And they're really in a tough spot because they're watching or had been watching steady trend growth, moving toward trend growth, inflation gradually moving down not as quickly as they had signaled they wanted. But I don't think ever to the degree that it was going to hold them back from continuing to ease.

And they've now had this tariff dynamic introduced to the equation where like everyone else in the world-- my bad running joke, anyone who tells you they know what's going to happen next doesn't. For the moment, that's the case. So they don't know. And when you don't know-- you shouldn't rush to action when you actually don't know what you think you're responding to because you're doing something in anticipation of an outlook you don't know.

Do I think they'll move back toward easing? I hope so. The market certainly wants it. Markets are pushing them forcefully to do that. But I think right now, it's a Fed that's on hold. And it gets a lot more interesting to use your word from the start of this discussion for them in the second half of this year. I think it gets a great deal more challenging.

Yeah. But for those clients who are very concerned, you don't see the potential of a default or--

In US, no, not at all.

Yes.

I will say I'm concerned about term structure, what happens to interest rates, because that is going to be informed by tariffs, by inflation, and by growth. If I had to pick the one thing, again, if I was sitting at the Fed that I'd be watching, it's labor markets, what's happening to employment.

And if employment is still strong and resilient, you'll tolerate weaker growth for a while, and you may tolerate inflation in its current range or a little bit higher. But like I said, third quarter, I think it gets a lot more complicated, but also a little bit more clear for them and where we're going to land, I hope.

There's a lot that has been said this year that people are looking at with regard to hard data, soft data. And it sounds like the labor market is one of those hard data things that's key for you.

And it's incredibly resilient.

Yeah.

Like, that may start to break, it hasn't.

Yeah, so in a way, as I'm listening to you, I almost feel relieved that--

You should.

--the economy is strong enough at this point that the Fed doesn't feel like they need to cut. I don't know that I view that-- like I view that positively.

Well, it's funny. It's why we're fully risked right now. If I had a more negative view, we'd be under a risk.

Yeah. So maybe the derivative question of that is, do you think that the market feels confident in the Fed, because that is a very important indicator, and their ability to navigate or toggle between the environment where inflation continues to heat up because of tariffs, with also the potential of a slowdown in growth, because we've talked about some of that CapEx potentially coming in?

It was going to kid you, the market's always frustrated with the Fed because all it wants is rate cuts to be able to fuel growth, to be able to view risk assets. So that's something that's always going to be ever-present. On confidence in the Fed, absolutely. And there's a big difference between frustration and confidence. If market was not confidence in the Fed, we'd watch so much greater volatility than we've seen. And we've seen a lot of volatility in the bond market and in the dollar.

The one thing I think that we've watched play out over the last few weeks has been the potential challenge to Fed independence, and that is a critical path critical to investors continuing to feel that confidence in the Fed. And that seems to have righted itself and markets have calmed down.

Yes, I agree. I agree. So you brought up the dollar, and we should talk about it. It has certainly come under pressure these last couple of months. And while that's not unusual, we haven't seen it for more than a decade.

We've seen the volatility, but--

Yeah.

But keep going.

That's fair. Yeah. So the dollar has come under pressure. And so if I am a global investor, how do I think about the impact that the dollar has had on my portfolio?

For that last decade, you're grateful for it. It has done nothing but help you, again, in fits and starts because markets are by nature volatile, but it's been a huge beneficiary of it.

A couple of things, just to frame the discussion, though, if you were to look at DXY, so I'm going to get a little geeky and I always try not to, but trade weighted dollar against developed market currencies. And it's predominantly weighted in the euro, which is this year where we've seen most of the pressure in the pain against the dollar.

So when you put those in context, if you look back over a 10-year period, we've basically round tripped right to about the average level. The dollar has been trading out against that basket. Again, lots of volatility around it. I think the pain this year has been just how quickly that hit.

It was very erratic. It was very painful and unwinding. But that rhymes with what we spoke about earlier on technology and the crowding in of foreign money into US markets. So that's repricing. It's leaving. It's going back to home and reference currencies. So it's not surprising that we're seeing that. I think it's just been the violence of some of those moves that have really caught the market's attention.

From the dollar, more broadly, the interesting question is the reserve currency piece of it. And I think the dollar remains a reserve currency. If you look, depending on whose math and reference data that you look at, the dollar is 85% to 90% of every foreign exchange trade done. And I want to say it's something like 60% of reserves held by other central banks.

So the dollar isn't going away. There's no obvious substitute for it. And so the reserve currency challenge to it, I just don't buy. It's been a steady pull pulling away from the dollar as a reserve currency, but that's been going on for 50 years. And I'm going to argue it's healthy because it reflects a better balance and dynamism across the global economy, which is ultimately good for everyone.

Yeah, and would potentially be good for US companies as well?

Correct.

Yes. So I guess the question is, does the dollar continue to head lower here? And I'm glad to hear you say that it stays the world's reserve currency because I think that's stabilizing. But what about over the near term in terms of the dollar?

I was going to kid you. If you know and can tell me, I'd love to know, and I've got to rush to make a couple of quick trades. Near term, it's really hard to answer-- and I know that's not satisfying for anyone to hear-- but it's hard to answer because I don't know what happens about the crowding in of foreign investment to the US, and if it continues to leave at the pace that we've been seeing, because that could be the driver on this. That's an EQ. That's an emotional dynamic and reaction to it. And there's no judgment in that statement. But I can't price that part of it.

I'll go back to some of the things that you would ask me about the Fed. So with the Fed on hold, and likely to remain on hold for a while, and let's take the counterpoints. The Bank of England and the European Central Bank, cutting interest rates because they're worried and more worried about growth in the near term and maintaining the dynamism in that economy. They don't want to see subtrend growth in a recession.

I think that dynamic becomes a lot more challenging for people to figure out. But the math means that interest rates in the US likely stay where they are. Interest rates outside of the US come down. As that interest rate differential increases in the US market's favor, that should stymie outflows--

Brings in the fixed income money.

--and create renewed interest. Yeah. So that should be, I think, the thing over the course of the next quarter that can provide some relief, but path-dependent on tariffs.

Sure, sure.

And tarrifs, which lead to that US exceptionalism potentially continuing.

Yes, less so. But yes.

Yes, that's fair. That's fair. So what I hear from clients is concern over what's been going on in markets. And I think understanding that you are constructive, you're watching, and I think that's probably, as you said before, you're cautious. But I think we still have a lot to learn.

I'll add one, Nancy, and we didn't talk about it in tech, but so great. Better buyer, better seller. The team is spending time looking at things to buy. The team is not spending time looking at things to sell.

And it's continuing to look at places like tech. It's continuing to look at places like financials in Europe. And your open-minded certainly to emerging markets, but the opportunity isn't there yet. And we feel good about the Fed's ability to navigate some of this complexity.

They have an impossible job. They're doing it well.

I would agree. I'm glad we have them. Thank you, Richard.

Pleasure.

Thank you. And for any further questions, please feel free to reach out to your JP Morgan team. Thank you very much for joining us today.

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While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios. The Six Circles Funds are U.S.-registered mutual funds managed by J.P. Morgan and sub-advised by third parties. Although considered internally managed strategies, JPMC does not retain a fee for fund management or other fund services. LEGAL ENTITY, BRAND & REGULATORY INFORMATION. In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC. JPMorgan Chase Bank, N.A. and its offiliates (collectively "JPMCB") offer investment products, which may include bank managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("JPMS"), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPM. Products not available in all states.

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