All into Account

Equity Strategy: Q2 earnings hurdle rate is again too low, but upgrades are unlikely for 2H

Speaker: Mislav Matjeka, CFA, Head of Global Equity Strategy
Consensus projections for Q2 have been cut significantly over the past months, resulting in the -12% yoy EPS growth expectation for S&P500, and -17% for SXXP. Ex commodities, this improves, and median EPS growth projections are around zero. At the same time, Q2 activity was overall robust, with global PMIs in expansion territory, and consistent with sequential EPS growth. Put together, the unassuming hurdle rate, coupled with activity which held up well during the quarter, is pointing to beats. Having said that, the stock price reactions in general could be more muted than in Q1, or at least any positive momentum might not have legs. Ahead of Q1, sentiment and positioning were cautious, but the equity market was strong coming into Q2 reporting season, suggesting buyside expectations are more elevated, even as analyst projections are subdued. Also, the question is whether the guidances will be raised on the back of quarterly beats, as there was some loss of momentum as we moved through the quarter, and China dataflow continues to disappoint. Out of early reports, with 70 S&P500 results and 90 in Europe, the majority are beating the consensus projections, but the stock price reaction to the beats is worse than typical. For the full year 2023, the S&P500 EPS growth rate currently stands at -1.0%, down from 3.2% in January, and SXXP at ‒0.4%, down from 1.6%. The full year projections are not overly conservative, even with these near zero growth rates assumed, as 2H earnings are expected to bounce 8% vs 1H levels. If in 2H the PMI momentum loses steam further, China activity stays disappointing, and pricing power erodes, all of which we subscribe to, and the lead indicators are pointing to, then EPS growth projections are set to move further down, with EPS revisions bound to spend time largely in negative territory.
This podcast was recorded on 23 July 2023.
This communication is provided for information purposes only. Institutional clients can view the related report at https://www.jpmm.com/research/content/GPS-4467241-0  for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2022 JPMorgan Chase & Co. All rights reserved.

All into Account: The great supply chain disruption: ASEAN’s rise, India’s potential, USMCA and Chino-Latino flows

Tune into our latest podcast on J.P. Morgan Research’s All into Account channel where we discuss why “de-coupling” is neither possible nor desirable but see new trade corridors emerging as supply chains are disrupted, commodity markets reshaped and industrial policy on the rise. We highlight the themes transforming the supply chain, examining the shift in traditional trading patterns and capital flows, and the regional implications. ASEAN and northern Asian countries are benefiting the most from shifts in global value chains, while Latin America is also well-positioned to benefit from friend- and near-shoring with the US and there’s long-term potential and incentives for supply chains to relocate to India. Russia-Ukraine war has permanently reshaped China-Russia trade and global commodities markets with diversification of currencies used to settle commodity trades, though de-dollarization fears are overstated.
Speakers:Joyce Chang, Chair of Global Research Sin Beng Ong, Chief ASEAN Economist Sajjid Chinoy, Chief India EconomistGabriel Lozano, Chief Mexico & Central America EconomistHaibin Zhu, Chief China EconomistNatasha Kaneva, Head of Global Commodities StrategyAlexander Wise, Strategic Research
This podcast was recorded on July 18, 2023.
This communication is provided for information purposes only. Institutional clients please visit www.jpmm.com/research/disclosures for important disclosures. © 2023 JPMorgan Chase & Co. All rights reserved.

Equity Strategy: The UW on Eurozone vs the US to have a next leg; Stay cautious on China, keep fading stimulus news

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy
Since the relative high in May to early last week, Eurozone has lost 12% vs the US, in USD terms, and is trying to bounce. We believe there is another leg of underperformance ahead, and reiterate our moving the region to UW two months ago. This was partly given our view that Eurozone activity momentum was about to roll over. Indeed, post the last two months of poor PMIs and other subdued data prints in Eurozone, its CESI is very weak currently, near the typical lows of the range. This could call for some short-term stabilization, but our view is that the Growth-Policy tradeoff in the region is likely to get worse through 2H. The gap between the performance of Eurozone/US equities and Value/Growth style has closed, but the next leg down could be driven by a move lower in bond yields, as well as the earnings disappointments coming up. Earnings and PMIs have a clear link, with downgrades likely at these levels of PMIs. What is at risk in Eurozone? The highest correlation with PMIs is usually seen among Autos and Banks. Banks could still have good numbers in Q2, as NII likely peaks towards the end of the year. We would use any strength on the back of positive results to reduce into. We stay cautious on Chemicals and Mining, despite an already meaningful chunk of underperformance. Capital Goods have been very strong in 1H, but could start to see weakness, as they typically trade with IP momentum. Finally, Semiconductors have near record inventory, many have been outperforming as a play on the AI theme, but the benefit is likely only marginal. The above outcome could be reinforced by any potential further disappointments in China. Now, as MSCI China was already down 20%+ from January highs to the recent low, the stimulus announcements, where the hopes are increasing, could result in bounces, but we advise using these pockets of strength to reduce further. The region is sliding back into deflation and the property market will likely need a much more aggressive policy support to rebound sustainably, given past excesses.
This podcast was recorded on 20 October 2022.
This communication is provided for information purposes only. Institutional clients can view the related report at https://www.jpmm.com/research/content/GPS-4461310-0  for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2022 JPMorgan Chase & Co. All rights reserved.

Equity Strategy: What is the market ex Tech/AI pricing in?

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy
 
Our AI basket is up 42% relative to S&P500 this year, SPX over SPW dispersion is at a meaningful 10%, and with Tech sector a standout outperformer, up 25% relative, there is a view among many that taking the Tech/AI out of the market, the rest is quite cautious and already pricing in a potential adverse scenario. We don’t subscribe to this view. The market ex Tech/AI is far from priced for disappointment. In terms of 12m forward P/E multiple, S&P500 is currently at 19.4x, Tech at 27.3x and non-Tech/AI part, the remaining 65% of the index, at 17.4x. This compares to 15.3x historical median, a 10%+ premium. At the low last October, when recession was the base case for most, S&P500 was trading at 15.3x forward P/E, with Tech at 18.1x and SPX ex Tech at 14.5x. Importantly, these P/E multiples are based off forward earnings which are generally near all-time highs, and significantly above the 2019, pre-COVID, levels. Market earnings levels are not depressed in the historical context, and have not seen any absolute downside, apart from some notable subsectors, such as Chemicals, Mining and Transport. Further, the current market valuations need to be put in the context of higher rates than in the past 10-20 years, and meaningfully higher at the short end. If one looks at yield gaps, comparing dividend yield to bond yield, all key DM markets are now trading less attractive than their 20-year average, apart from Japan (OW), which continues to screen cheap. The above considerations add to much higher positioning and more optimistic sentiment than was seen at the start of the year. FOMO is in full swing, there is complacency being built into stocks with VIX at the lows of its range. All this suggests that, if the activity momentum does weaken in 2H, relative to the current projections of no/soft landing, stocks are unlikely to shrug it off, or look through, as they are not priced for disappointment anymore, even if one is to fully take out the Tech/AI/FAANG groups from the equation.
 
This podcast was recorded on 10 July 2023.
This communication is provided for information purposes only. Institutional clients can view the related report at http://www.jpmm.com/research/content/GPS-4455973-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2023 JPMorgan Chase & Co. All rights reserved.

Equity Strategy: July Chartbook – Divergences are building, how will they close?

Speaker - Mislav Matejka, CFA, Head of Global Equity Strategy
The market is increasingly confident that the weak parts of the economy are set to improve, and that the good parts will stay resilient. In a sense, bad is seen as good: “China dataflow is so weak that there must be stimulus, manufacturing PMIs are so weak that they are bound to rebound”. This is producing an interesting divergence in the performance of Cyclicals vs Defensive stocks and the activity dataflow. Compared to a year ago, Cyclicals are up vs Defensives by 20% in Europe and in the US, but manufacturing PMIs and ISM are in contraction territory. Which one will end up right? There was another period when the divergence like this opened up – in 2007, with Cyclicals rallying despite manufacturing activity weakness, and Fed was then also at 5.25%, with the belief that they needed to do more, the same as now. Fundamentally, we think that bond yields will move back down, pricing power is waning, PMIs could indeed converge, but with services coming down towards manufacturing in 2H, as M1 suggests, rather than the other way around, and the hopes of a swift and meaningful China stimulus could remain just that, hopes. The market needs to resolve a basic disconnect: how will the Fed pivot if there is no pain? Bull-Bear has moved into positive territory, Vix is near record low and positioning has increased, there is no more safety net, FOMO is in full swing. Keep UW Eurozone in regional allocation, stay cautious on China, Japan remains our regional OW for this year. Preference for Growth over Value should remain a winning strategy in 2H.
This podcast was recorded on 02 July 2023.
This communication is provided for information purposes only. Institutional clients can view the related report at https://www.jpmm.com/research/content/GPS-4450902-0  for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2022 JPMorgan Chase & Co. All rights reserved.
 

All into Account: 2023 Mid-Year Outlook Key Takeaways

Speakers:  Samantha Azzarello, Head of Content StrategyThomas Salopek, Head of Cross-Asset StrategyBruce Kasman, Chief Economist for J.P. MorganMislav Matejka, Head of the Global Equity Strategy Stephen Dulake, Global Head of Credit, Securitized Products and Public Finance ResearchJay Barry, Co-head of US Rates StrategyFabio Bassi, Head of European Rate StrategyJonny Goulden, Head of EM Local Markets & Sovereign Debt StrategyMeera Chandan, Co-Head of the Global FX StrategyNatasha Kaneva, Head of the Global Commodities Strategy 
This podcast was recorded on Jun 27, 2023.This communication is provided for information purposes only. Institutional clients can view the related reports at  https://www.jpmm.com/research/content/GPS-4442931-0, for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2023 JPMorgan Chase & Co. All rights reserved.

Equity Strategy: Reiterate that broadening in leadership is unlikely to have legs without yields, PMIs nor earnings moving up

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy
We believe that the broadening in market leadership that was seen at some points this month is unlikely to have legs, as we don’t expect bond yields to move higher, especially not for the right reasons. Cracks in the labour market are emerging, manufacturing PMIs are not converging with services, as consensus was expecting; in fact the opposite appears to be happening, and any China stimulus might end up underwhelming – sell the news. We keep OW Growth vs Value style, and think that pure Defensives could catch a bid – Staples, Utilities and Healthcare, given our projection of falling bond yields in 2H, risk of weaker PMIs and challenging EPS revisions. EPS revisions for S&P500 have finally moved positive for some weeks, the first time since last summer, but any continued improvement will be at odds with a potentially weakening labour market. The claims indicator last week entered into bearish territory. Also, one typically needs composite PMIs above 53-54 in Eurozone for sustained EPS upgrades, but that might be lacking. Manufacturing PMIs are unlikely to bounce much if one considers M1 leading indicators, and the services PMIs are at risk of rolling over, too. This would be reinforced if the labour market is turning, as this could undermine the so far resilient final demand picture, and lead to more destocking. Regionally, we think the trade of OW UK or OW Switzerland vs UW Eurozone should be put on in 2H, we reiterate our downgrade of Eurozone to UW from last month.
 
This podcast was recorded on 26 June 2023.
This communication is provided for information purposes only. Institutional clients can view the related report at http://www.jpmm.com/research/content/GPS-4445719-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2023 JPMorgan Chase & Co. All rights reserved.

All into Account: ‘Oil Markets: The Labors of Sisyphus’ with Natasha Kaneva, Head of Global Commodities Research

Speakers:  Thomas Salopek, Global Cross Asset Strategy Natasha Kaneva, Head of Global Oil and Commodities Research 
 
This podcast was recorded on June 15, 2023.This communication is provided for information purposes only. Institutional clients can view the related reports at  https://www.jpmm.com/research/content/GPS-4431498-0, and https://www.jpmm.com/research/content/GPS-4436085-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2023 JPMorgan Chase & Co. All rights reserved.

All into Account: El Niño - Market implications for Asia, and why we think the spotlight turns to climate adaptation

After three years of La Niña conditions, climate prediction models are forecasting a transition to El Niño later this year. This could mean lower rainfall across parts of Asia, among other effects, and has market implications, particularly in commodity- and consumer-related sectors. A switch to El Niño could also exacerbate the warming effect of climate change and see global temperatures temporarily breach the 1.5°C threshold of the Paris Agreement for the first time. From an ESG and climate change investing perspective, new heat records could refocus the lens on adaptation, which, so far, has proven to be an under-invested theme. J.P. Morgan analysts Jeff Ng, Sin Beng Ong, Jeanette Yutan, Sanjay Mookim and Hannah Lee discuss all of this.
This podcast was recorded on Jun 07, 2023.
This communication is provided for information purposes only. Institutional clients can view the related report at https://jpmorganmarkets.com/research/content/GPS-4401757-0, https://jpmorganmarkets.com/research/content/GPS-4416824-0, https://jpmorganmarkets.com/research/content/GPS-4408623-0 and https://jpmorganmarkets.com/research/content/GPS-4407092-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2023 JPMorgan Chase & Co. All rights reserved.

Equity Strategy: Regional allocation - assessing the relative attractiveness of Japan vs Eurozone

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy
Out of larger DM exposures, we started the year with constructive calls on both Eurozone and on Japan. Within this, we have last month cut Eurozone,  to outright UW. The question is why stay OW Japan then, given that Japan is typically seen as having a similar type of exposure as Eurozone is, a play on global manufacturing cycle with Cyclical Value sector tilts. We believe that Japan will be a better relative value trade than Eurozone in 2H, even against the backdrop of potential weakening in global activity momentum and likely falling bond yields. Apart from delivering a strong run, of 30%+ in USD terms vs the US since September, we have cut Eurozone due to worsening Growth-Policy tradeoff in the region. ECB is likely to stay hawkish given continued pickup in wage growth, but on the other side the best of the recovery in activity seen at the turn of the year is likely behind us. In addition, we believe China will keep stalling in 2H, with hopes of any material stimulus likely ending up unfulfilled. While Japan is a China and global activity play to a large extent, as well, we stay constructive Japan, reiterating the upgrade to OW made in December. Performance-wise, Japan was behind Eurozone until recently, but it is starting to break out, in USD terms as well, and not just in local FX. The reasons that Japan could act differently this time around are: first, a certain disconnect to the global cycle, on the back of the most delayed reopening within DMs, and the YCC control, driving bond yields divergence, and therefore the divergence in borrowing costs. Second, inflation for Japan could be seen as a tailwind, with real wages expected to finally move up, rising asset values and improving pricing power. In a sense, Japan could be a good hedge on inflation risk, in the event inflation turns out to be more problematic than consensus assumes. Third, Japanese equities remain extremely cheap, with the highest proportion of net cash companies, and there is at long last a catalyst for rerating – in the form of TSE initiative. Japanese buybacks are rising.
 
This podcast was recorded on 11 June 2023.
This communication is provided for information purposes only. Institutional clients can view the related report at http://www.jpmm.com/research/content/GPS-4435627-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2022 JPMorgan Chase & Co. All rights reserved.