JPMorgan Chase & Co. remains optimistic about equities in the second half of the year, shrugging off a host of concerns including geopolitical tensions, inflation fears, concentration risks, the direction of the economic cycle, and a sell-off in the bond market.
The bank's strategists said in a note: We believe that stock indices will hit new record highs in the second half of the year, and we expect further gains.
At a deeper level than indicators, JPMorgan Chase & Co. has been calling for a rotation and expansion of market participation over the past two months, a trend it expects to continue. The bank recently noted a recovery in momentum deals, particularly in the semiconductor sector, but it does not expect the technology sector to be the top performer in the second half of the year, unlike last summer.
Strategists noted that high volatility has become a firmly established feature of the markets, with profitability concerns expected to return from time to time.
The team drew a comparison with 2022, asserting that it does not anticipate a significant increase in inflationary pressures and sees no need for central banks to adopt a more hawkish stance. Regarding the labor market, the strategists described the outlook as mixed, citing data indicating weak confidence in employment levels.
They explained that this could lead to a bad news is good news reaction in the stock markets, as weak labor market data reduces concerns about the Federal Reserve needing to intervene to address the overheating economy. They also noted that a weaker dollar is a positive factor, particularly for international equities.
Strategists confirmed that their expectations of a reassuring second-quarter earnings season for stocks had been met, as both the United States and Europe recorded year-on-year earnings per share growth rates exceeding 20%.
They also reiterated a recommendation they issued two months ago, advocating for a decline in high-beta stocks and a rebound in low-volatility stocks. They argued that this defensive rotation, including gains in the healthcare and consumer staples sectors, was likely purely tactical and expected to last only a few weeks, not extend into the second half of the year. The team reaffirmed this view, recently calling for a resumption of the rally in high-beta stocks, noting that low-volatility stock groups had returned to their downward trend.
The sloping yield curve was cited as an additional support factor for cyclical stocks. Within this group, JPMorgan Chase & Co. highlighted the attractiveness of the banking, mining, industrial, and consumer staples sectors, along with an expectation of stable trading in semiconductor stocks.
The strategists wrote: “If the overall outlook we have outlined for the second half continues on its trajectory, it will support further upside for stocks, as well as further outperformance for stocks with a high beta coefficient.”
