Investment Strategy
Apr 25, 2025
Threading the needle: Where markets may be mispricing trade risk
U.S. equity markets are heading toward their second-strongest weekly finish of 2025.
The S&P 500 (+3.8%), NASDAQ 100 (+5.2%) and small caps (Solactive 2000 +4.1%) are all heading higher. Globally, European (+3.6%), Japanese (+2.5%) and Chinese onshore (+2.4%) equities also made significant gains. Much of the market momentum seems linked to positive talks on trade and a possibility of the United States lowering tariff rates on China (more below).
Bond yields are heading toward a flat finish for the week, while gold (-0.9%) and oil (-2.9%) both finished lower.
The story moving markets this week was a Wall Street Journal report that the United States is considering extending an olive branch in the form of a trade deal with China. The report states that the Trump administration is considering reducing tariffs on Chinese imports, potentially by more than half, to ease tensions with Beijing that have affected global trade and investment. President Trump indicated that any tariff decisions will come directly from him, and that China was open to dialogue.
Later in the day, Treasury Secretary Scott Bessent pulled back the olive branch slightly and clarified that President Donald Trump has not offered to unilaterally reduce U.S. tariffs on China. Bessent emphasized that neither side views the current tariff levels as sustainable, suggesting that a mutual reduction might occur. He noted that the strongest ties between Washington and Beijing are at the leadership level, with no set timeline for engagement, and that a full trade rebalancing could take two to three years.
However, the next day, China’s Commerce Ministry spokesman He Yadong stated “any reports on development in talks are groundless,” and that the United States needs to show “sincerity” if it wants to make a deal.
This further tangles the complex geopolitical thread that has been spinning since April 2. We (and the rest of Wall Street) don’t have an edge in determining what trade deals will be made or when. But in light of the persistent tension between the world’s two largest economies, we present opportunities in which we identify mispricings that could mean value for investor portfolios. Below, we list three:
1. Domestically focused European corporations: As tariff uncertainty grows, markets that are relatively immune become more attractive. Close to 50% of European equity revenue comes from within the region, meaning that those revenues are relatively more insulated against fluctuations in external trade.
Domestic exposure in Europe close to 50%
Euro Stoxx 50: geographic revenue exposure (’25E)
Source: FactSet. Data as of April 24, 2025.
The revenues sourced within the region become more important when you consider that, for the first time in a long time, Europe is becoming a domestic growth story. Germany’s €500 billion fiscal stimulus package is significant, exceeding 1% of GDP; for perspective, that’s larger than the U.S. fiscal response amid the COVID-19 pandemic on a relative GDP basis. Our estimates suggest the package could lead to an annualized GDP increase of 0.6%–0.8% for Germany over the next three years, spilling over to the European region and boosting growth by 0.4%–0.5% per year during that period.
We think the boost to growth could lead to sustainably higher multiples for European equities toward 14.5x forward earnings from ~14x now, which would still represent a ~30% discount relative to current U.S. valuations. What’s more, as we focus on increasing income in portfolios, European equities offer a dividend yield ~200 basis points above the S&P 500.
The kicker comes in the form of a historically ignored factor for U.S. investors: foreign exchange return. While we do not foresee the dollar losing its reserve currency status soon (nearly 90% of all FX trades involve the USD), capital will likely continue its shift at the margin out of dollars and into other global markets amid downside USD risks. While the Euro Stoxx 50 has returned ~+4.5% year-to-date in local currency terms, the euro’s appreciation against the dollar has led to gains in the mid-double digits for unhedged dollar-based investors.
2. Municipal bonds for tax-sensitive U.S. buyers: The Bloomberg Municipal AAA yield curve has steepened significantly, with the 30-year yield increasing close to 70 basis points year-to-date, reaching levels not seen since the global financial crisis. This steepening, along with the absolute yield on the Bloomberg Municipal Bond Index, presents a compelling investment case.
It’s not just the absolute yield, but also the relative yield versus Treasuries (Muni bond yield/Treasury yield of similar tenor, where a higher ratio is better for munis) that stands out as attractive. Both the 2- and 5-year parts of the curve are trading cheaply on 1-, 5- and 10-year averages, while the 10- and 30-year parts are attractive relative to 1- and 5-year averages.
Current municipal bond ratios are favorable relative to history
Municipal bond yield to Treasury yield ratio, %
Source: Bloomberg Finance L.P. Data as of April 24, 2025.
Lastly, the inflation-adjusted yield in munis stands out as particularly compelling. The chart below shows the yield for the 10-year AAA callable Municipal Bond Index and the 10-year breakeven rate (a market measure of inflation over the next 10 years). The orange bars represent the spread between the two, and currently that spread (or compensation above inflation expectations) is in the 99th percentile since 2010, meaning the estimated “real yield” on a 10-year muni is at one of the highest levels in a decade and a half.
10-year muni real yield in 99th percentile
10-year callable muni yield, 10-year breakevens, and spread, %
Source: Bloomberg Finance L.P. Data as of April 24, 2025.
What’s driving the cheapening in municipal bonds is market concerns over their tax-exempt status.
Municipal bonds are debt securities issued by states, cities or other local government entities to fund public projects. The interest income from these bonds is typically exempt from federal income tax (the federal government doesn’t tax municipalities, and vice versa). This tax exemption makes municipal bonds attractive for individuals in higher tax brackets.
The U.S. government is seeking ways to limit its deficit while passing an extension of the Tax Cuts and Jobs Act. The House of Representatives voted to adopt the Senate-amended fiscal year (FY) 2025 concurrent budget resolution, allowing for legislation to add $5.8 trillion to deficits through FY 2034. Some chatter in Washington has floated taxing municipal bond interest to raise government revenues. Given that the government only misses out on ~$30 billion per year in revenue by not taxing muni bonds, changing that policy wouldn’t make a dent. Our base case remains that municipal bond interest will remain exempt from federal taxes, and will continue to be a ballast and diversifier in portfolios.
3. Private equity secondaries: Dealmaking activity (M&A and IPOs) has been more muted than the Street was expecting coming into the year, in part given uncertainty post–“Liberation Day,” still elevated rates and equity market volatility. The higher probability of prolonged uncertainty has created a cloudier outlook on the pace of a dealmaking recovery in the near term. This is coming at a time in which private equity assets are aging—the median holding period for buyout-backed exits has risen to ~6 years, and global buyout distributions as a percentage of net asset value (NAV) are at their lowest since 2009. These two conditions together are likely to drive an increase in “non-traditional” exits, such as secondaries, which can provide essential liquidity in these markets.
Secondaries volume has grown while buyout distributions have declined
Secondary volume, $bn Global buyout dist. % of NAV
Sources: Bain PE Annual Report, Jefferies Secondaries Report. Data as of 2025.
Secondaries are transactions in which investors buy and sell existing stakes in private equity or other alternative investment funds. They can be LP-led (a limited partner sells its commitment in a fund to a secondary buyer) or GP-led (a general partner sells one or more portfolio companies to another vehicle). Secondaries generally offer investors portfolio diversification by allowing them to acquire interests in existing funds across different vintage years and managers, mitigating risks associated with single-fund investments. Additionally, they help bypass the early-stage “J-Curve” effect, enabling investors to potentially see returns sooner by investing in more mature funds. These transactions also often come at a discount to the NAV. These factors combined present the opportunity for secondaries to generate attractive risk-adjusted returns.
For more details on how these options may fit in your portfolio, reach out to your J.P. Morgan team.
RISK CONSIDERATIONS
All market and economic data as of April 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
Important Information
As tension grows between the world’s largest economies, we explore where investors can find opportunity.
Jacob Manoukian
U.S. Head of Investment Strategy
Alan Wynne
Global Investment Strategist
Published Apr 25, 2025
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