Investors are hoarding cash, a tidal wave of non-tech earnings is quietly rising, and 3 other fascinating takeaways from JPMorgan Asset Management's mid-year outlook
- Stocks have thrived this year as economic growth stayed steady and inflation dipped.
- JPMorgan Asset Management's leading strategists shared what to expect later this year.
- Here are five key takeaways about stocks and the economy from JPMAM's latest report.
Although 2024 has had its share of surprises, many predictions made six months ago by David Kelly, the chief global strategist at JPMorgan Asset Management (JPMAM), have been spot-on.
The market veteran and his team came up with a snappy mnemonic device to summarize their US economic outlook this year: "2024," based on calls for 2% GDP growth, zero recessions, 2% price growth, and a 4% unemployment rate.
While the year isn't even halfway over, those targets seem to be on point — except for inflation, which is steadily drifting downward but will likely end the year closer to 3% than 2%.
In mid-June, Kelly and Americas strategy chief Gabriela Santos unveiled their mid-year outlook at a press event, which reaffirmed some observations made in its last quarterly guide but also had a slew of new insights. Below are five of the most head-turning points that JPMAM made.
At the end of the first quarter, Kelly made a head-turning and even controversial claim: the immigration surge in the US, though chaotic, had played a key role in staving off a recession.
The US economy has stayed on solid ground despite the overhang of elevated interest rates, much to the surprise of some market observers. Second-quarter GDP should clock in between 2% and 2.5%, according to JPMAM, which would be in line with the firm's full-year target.
Not only have immigrants boosted consumer spending, but they seem to have inadvertently driven down inflation by competing with US workers, thereby limiting wage gains, Kelly noted.
"Immigrants are coming — in, particularly, these lower-paying jobs — taking these jobs, and filling some of the gap," Kelly said at the event. "That's also helping hold down wage growth."
This dynamic is another headache for low—and middle-income consumers, who are already being disproportionately squeezed by inflation. Kelly said consumer spending on non-durable goods was lower in April than in December, which may be a harbinger of weakness.
However, the global strategy chief believes the benefits of immigrants far outweigh the drawbacks. He even said that "if you completely slam the door on immigration, you're going to kill the soft landing."
Mega-cap growth stocks, which have long driven the S&P 500, took a brutal blow in 2022, which was the worst year for equities since 2008. A septet of large-cap leaders — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — saw their earnings shrink 14% that year while the other S&P 500 members enjoyed 9% growth.
Since then, those technology titans have crushed the rest of the market in earnings growth and returns. Stocks in the so-called Mag 7 grew earnings by 31% last year and are on pace to post similarly strong profits this year. By contrast, the other 493 stocks in the S&P 500 saw their earnings fall in 2023.
Even more astounding is that Mag 7 stocks accounted for 89% of the S&P 500's return in 2023, compared to 65% in 2019, Santos noted. The market is undoubtedly top-heavy, and though that may not lead to disaster, it likely isn't sustainable either.
"We don't think it's a bubble," Santos said at the event. "We do think there are positive reasons for them to keep going up. It's just that it's too outsized in terms of contribution."
The Magnificent 7 no longer trades like a monolith, as Nvidia and Microsoft have separated from laggards like Tesla this year. But for simplicity's sake, JPMAM strategists still compared the cohort to the rest of the S&P 500, and their earnings projections for the groups are startling.
According to JPMAM, the long-standing gap between Magnificent 7 firms and the "S&P 493" will narrow in the coming quarters and then be eliminated entirely. The firm is calling for 17% earnings growth in the fourth quarter, both for stocks in and out of the Magnificent 7. That would be a significant improvement for non-Mag 7 firms, which slid about 2% to start the year.
All 11 market sectors will enjoy earnings growth in Q4 for the first time since Q2 of 2021, according to JPMAM's projections. That includes healthcare, energy, and materials, which saw earnings decline earlier this year.
For the last 18 months, the main catalyst for the Magnificent 7 stocks driving the market higher has been enthusiasm about artificial intelligence and the productivity gains it enables.
The first phase of the AI explosion has disproportionately benefited tech stocks. Chipmakers are the most obvious winners from the exponential rise in capital expenditures by so-called cloud "hyperscalers," but those firms have also been rewarded by the market for investing in AI.
However, Santos said that the next iteration of the AI boom is here, which will benefit companies across sectors. The strategy chief said some of the biggest winners will be industrial firms that build semiconductor manufacturing equipment, utilities that will power energy-intensive AI processes, and even healthcare companies that will use AI to develop new treatments.
Although excitement about AI is warranted, JPMAM encouraged investors to be cautious.
"While the emphasis on AI may be justified, the concentration of returns amongst a few AI leaders suggests some vulnerability for markets as adoption speeds are still highly uncertain and sentiment has been ebullient," JPMAM strategists wrote in the report.
International equities have performed well due to their cheap relative valuations and improving economic data, JPMAM strategists noted, and the global bull market can continue to broaden.
"We see positive economic surprises, especially from Europe and including emerging markets with some slightly more positive surprises from China," Santos said. "It's a story of a steady global economy and one that's becoming less divergent in terms of momentum."
However, many investors are overlooking overseas companies. US stocks make up nearly two-thirds of the MSCI All Country World Index, which is the largest concentration on record.
An obsession with US-based firms has driven the S&P 500's forward price-to-earnings (P/E) ratio above 20x, which Santos said is a full standard deviation above its long-term average. Elevated valuations don't spell doom for stocks, she noted, though they do suggest that future returns will be lower than they've been.
If a tougher backdrop is ahead, stock-pickers should outperform passive investors, according to JPMAM. Sitting in a low-cost S&P 500 index fund worked wonders during last decade's low interest rate backdrop, but since stocks are more pricey, active managers will likely fare best.
Although stock valuations are stretched, there's reason to believe they can rise even higher.
Investors held cash at the highest rate in 12 months in May, according to JPMAM, whose strategists also noted that there's record level of dry powder sitting in money market funds.
While it may appear that investors are being cautious with US stocks near all-time highs, there's also a glass-half-full case that the rally has room to run as that cash moves off the sidelines.
Although the path forward for equities is far from clear, JPMAM strategists concluded their report by recommending that investors step out of low-risk investments, even though they're offering solid rates of return.
"Investors would therefore do well to diversify and lean on active management, stepping out of cash and into risk assets to take advantage of the anticipated changes ahead," JPMAM strategists wrote in the report.
As for where to invest, JPMAM spoke highly of large caps, mid caps, and high-quality, profitable companies that are fairly valued within US markets, plus short-duration and high-quality bonds.