Equity Strategy : From one extreme to another; Good entry point to look for a renewed tactical bounce in Growth

Speaker: Mislav Matejka, Head of Global Equity Strategy.

The market has now settled into a view that Fed will continue with outsized hikes for the foreseeable future. What a difference to only a year ago when almost no hikes were priced in. So, will the next 6-9 months be like the last 6-9 months? Will the Fed deliver on what is currently priced in, and more fundamentally, do they need to deliver on this in order to achieve their inflation objective? So far this year, there was no other problem to focus on bar inflation, as payrolls were exceptionally strong every single month, averaging ~400k ytd. In a sense, it was “easy” for the Fed to maintain a hawkish message, as the collateral damage was not yet visible. Next 6-9 months are likely to look quite different. For one, US composite PMI is at 49, in contraction territory. A number of corporates are warning on earnings outlook. Inflation will show more and more visible signs of a peak and a move lower. PPIs are down, pointing to softer prints, as are pretty much all commodity prices. Many inflation outlook metrics are also showing some softening. Inflation expectations within consumer confidence surveys have turned lower of late. Inflation forwards are also lower most recently. There is more evidence of inventory overhang, and discounting, as well as of downtrading in corporate results. Corporate pricing intentions have clearly turned lower. After all, inflation has always been a lagging indicator of growth. Finally, Fed is not starting this next phase from a zero level, and desperately behind the curve, but from 3.25%. This could act to limit further moves up in long yields, which look oversold right now. We note that the gap between PMIs and yields is these days at the other extreme. In the last 1.5 months Value style outperformed again, with top sectors Banks, Insurance and commodities. We have entered the year-long Financials and OW both Mining and Energy, and stay so from the fundamental perspective, especially OW Banks&Insurance given likely strong earnings trends and a limited delinquencies risk. Now that Growth, and Tech, have traded back down though, there could be an opportunity for another tactical bounce in Growth, similar to what we have seen in the summer.

 

This podcast was recorded on 26 September 2022.

This communication is provided for information purposes only. Institutional clients can view the related report at https://www.jpmm.com/research/content/GPS-4214271-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2022 JPMorgan Chase & Co. All rights reserved.