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Contributors

Madison Faller

Global Investment Strategist

Sarah Stillpass

Global Investment Strategist

Matthew Landon

Global Investment Strategist

 

Since the launch of our 2024 Mid-Year Outlook: A Strong Economy in a Fragile World, we’ve been talking to our clients across the globe.

Along the way, we’ve heard excitement about the year ahead, but also remaining questions. In the spirit of this week’s summer solstice and the kickoff of vacation travels, we’ve curated a “road trip playlist” to answer the top queries, concerns and challenges we’re hearing to our view.

Before we dig in, here’s our view in short. Global growth is proving stronger and more durable than most expected. Despite sticky inflation, high rates, and the fragility that comes with geopolitical and election uncertainty, most macro and market variables in developed economies remain solid. Companies are posting stronger profits, labor markets are finding a better balance and artificial intelligence (AI) is just getting started. We think that backdrop will power stocks higher through the year. Yet, if growth stumbles, bonds can provide stability. Investors should feel confident that their asset toolkit can support their long-term goals.

From that view, here are the 5 questions we’re hearing most, set to the tune of some of our favorite tracks.

Only big names are driving the rally. Is it a bubble?

Track: Don’t Stop Believin’ by Journey

Stocks have been on a rip higher since the market bottomed in October 2022, with the S&P 500 rallying close to 60%! So, what’s the worry? If you didn't hold mega-cap tech stocks, you missed half of it. We are seeing more companies join in this year, but the trend continues: Last week marked the first time on record that the S&P 500 rallied over 1.5%, while its equal-weighted counterpart fell more than half a percent.

That might feel like “a lonely world,” and it’s led many to question: Is the stock market a bubble? We don’t think so. For one, unprofitable companies haven’t propped up this rally as in other bubble-like times. While a few companies may be driving the bulk of the rally, it’s been supported by underlying, high quality earnings strength.

Line chart showing the rolling 12-month total return of unprofitable companies in the Russell 3000.

 

From here, we think tech stocks can “hold on to that [good] feelin’”, but we also think momentum will broaden. Durable growth, moderate inflation and a shift towards rate cuts should enable other areas of the market to participate. By Q2 next year, all 11 S&P 500 sectors are expected to post profit growth on a year-over-year basis. That’s something we haven’t seen since 2018.  Some of our highest conviction is in sectors like industrials, healthcare and consumer discretionary, alongside high quality small and mid-cap companies.

In short, “don't stop believin’” in the rally. We see a promising second half ahead.

The AI boom has been loud. Could it go bust?

Track: Everywhere by Fleetwood Mac

AI is “everywhere.” Earlier this week, Nvidia surpassed Microsoft to become the world's largest company by market cap, now over $3 trillion. For some, that’s triggered memories of the dot-com era.

While AI's rollout will likely face challenges, we think it’s just making its start. Only 5% of U.S. companies are actively using AI today, according to the U.S. Census Bureau. Yet, some 50% of the S&P 500 by market cap mentioned AI in their Q1 earnings calls. The flurry of AI investments could quickly generate cost savings and efficiencies, and if historical patterns hold, its economic impact might be felt in half the time it took for the PC and internet.

Many will question AI's potential, just as with past technologies. As one famous example, in 1998, Paul Krugman (a winner of the Nobel Prize in Economics) predicted that “by 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machines.” The lesson: We think investing in AI requires patience.

Line chart showing the Gartner hype cycle of expectations changing over time.

 

Not all companies will be winners, and some that don’t yet exist will disrupt or replace incumbents. That makes thoughtful exposure, focused on companies that could benefit from increased productivity or revenue (or both), crucial.

Inflation lingers, rates are swinging. Are bonds worth it?

Track: Style by Taylor Swift

Investing in bonds over the past few years has felt like a “long drive with no headlights.” After the "higher for longer" rate reset pushed yields to their highest since the Global Financial Crisis, rate cut bets and cooler data have brought U.S. Treasuries close to erasing their year-to-date losses. Elevated yields signal that the income and diversification power of bonds is back. However, fluctuations, especially with ongoing debates around inflation, government debt and geopolitics, may still cause volatility. Is it worth the hassle?

We’re believers that bonds “never go out of style”; it just matters how you use them. Investing in different pockets of fixed income, across the curve and risk spectrum, has its merits. For instance, as the Fed eventually joins the rate cut party, we grow even more skeptical of cash, and short-duration credit can lock in still-elevated yields for longer. Meanwhile, given how far rates have reset, longer duration bonds now offer meaningful diversification in the event of an economic slowdown. For U.S. taxable investors, municipal bonds can be especially powerful tools, offering a potential yield pickup on a tax-advantaged basis.

With the right approach, we think investors can keep a “James Dean daydream look” in their portfolio's eye.

Are consumers actually solid? Signs point to slowdown

Track: I Won’t Back Down by Tom Petty

If you just read the headlines, you might think the consumer is hitting hard times. Tuesday's U.S. retail sales print was weaker than expected, with ex-auto sales falling -0.1% and the “control group” rising a modest 0.4%. The prior two months also saw downward revisions. Consumer sentiment recently took another hit, and many note rising delinquency rates. Adding to that, Q1's earnings season saw household names like Starbucks, McDonald's and CVS warning of slowing demand amid higher rates and costs.

But a wider lens shows underlying strength. Consumer spending has slowed from its start-of-year clip, but remains solid thanks to income gains. While interest costs have risen, especially for credit cards and auto loans, 70% of American households’ debt is in their homes, and over 90% have fixed-rate mortgages, keeping overall debt burdens low. With 70% equity also in their homes, many Americans have reason to “stand their [spending] ground,” albeit more discerningly. Payment bellwethers like Visa and American Express signaled the same during the last earnings season.

Line chart showing the U.S. nominal income and spending increases on a year-over-year basis.

 

In all, the Atlanta Fed's GDPNow estimate for Q2 is running at a sturdy +3% annualized pace. We don't think the strong economy is “backing down,” even if it's slightly cooling.

Are we underestimating the U.S. election impact?

Track: Changes by David Bowie

The year of elections has been busy. Political results in Mexico and India last month shook things up, and snap elections in France recently injected new volatility. The UK also heads to the polls soon, and U.S. elections are approaching in November.

Debates around the budget, taxes, tariffs and regulation are intense. Historically, economic and earnings fundamentals matter most, with the president having a minor influence on market returns. Meanwhile, markets particularly sensitive to political outcomes – like small-and-mid-cap equities, clean and traditional energy and the U.S. dollar – could see bigger moves alongside the election outcome.

One of the most notable risks we see lies in the likelihood that neither U.S. candidate stands to be fiscally conservative. That could worsen the debt and deficit picture. Just this week, the Congressional Budget Office signaled a higher deficit for both this fiscal year and the next decade. At some point, tax rates are likely headed higher. That makes tax efficiency a crucial part of any investment strategy.

In the end, we don’t think this should disrupt investors’ long-term plans. We believe the economy, markets and investors are well-placed to adapt to the “changes,” “turning and facing [any] strain.”

A strong economy in a fragile world

As we enter the second half of 2024, the market presents both challenges and opportunities. Despite “bubble” worries, the stock rally is backed by strong growth, accelerating earnings, and growing AI enthusiasm is everywhere. Bonds have regained appeal with elevated yields.

Don't stop believin’ in the market's potential. A plan that’s fine-tuned to your long-term goals never goes out of style and can help you prepare for the inevitable changes that come alongside investing.

All market and economic data as of 06/21/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

Index definitions:

The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight of the index total at each quarterly rebalance.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The S&P 500 Equal Weighted Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases. 

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

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