Equity Strategy: Approaching a bridge too far for Cyclicals & Banks?

Speaker: Mislav Matejka, Head of Global Equity Strategy.

We believe that the current market rally will start fading as we move through Q1. The positive catalysts that we were highlighting from October, and which helped drive a rebound of as much as 27% for SX5E – peak in bond yields, in inflation and in USD, China reopening and more benign European gas prices – are now in the open. While January still offers favourable seasonals, and the current investor positioning is far from heavy, both of which support stocks for the time being, we believe that one should be using potential gains over the next weeks in order to reduce exposure. All Cyclicals performed very strongly, and all Defensives lagged over the past six months. In fact, Cyclicals vs Defensives unwound all the losses seen in the 1H of last year, back to highs. The market is behaving as if we were in an early cycle recovery phase, but the Fed has not even concluded hiking yet. Typically, this phase is seen only after a period of Fed cuts. We stick to our call from October that bond yields have likely peaked, and will still be flat/down in 1H, which typically helps Defensives. Also, Cyclicals appear to be pricing in the rebound in PMIs back to solid expansion territory in 1H, but our lead indicators point to more softness. Finally, earnings are likely to be challenged next. We maintained a bullish earnings view over the past two years, as the spike in PPIs was used by corporates as an opportunity to raise prices. Far from seeing a margin squeeze, profit margins improved significantly for most. This will change: we look for downside to earnings for Cyclicals, on weaker pricing. At some point in 2023, Cyclicals are likely to rally more sustainably, discounting a fundamental inflection point in PMIs and a bottoming out in earnings, along with a potentially clearer pivot by the Fed, but this is not yet, in our view.

 

This podcast was recorded on 16 January 2023.

This communication is provided for information purposes only. Institutional clients can view the related report at https://www.jpmm.com/research/content/GPS-4307377-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2023 JPMorgan Chase & Co. All rights reserved.