Past performance is no guarantee of future results. It is not possible to invest directly in an index.

Looking into the final months of the year, a number of catalysts are on the horizon – and could give markets the push they need to find direction. Today, we explore five we’re focused on.

Spotlight: Catalysts through year-end: 5 things to watch for

1) Inflation: Could it be reaccelerating?

Some wonder if progress could be petering out – especially as segments like energy and core goods (which led the bulk of the price declines over the last year) are showing some signs of reaccelerating.

The next few reports will probably show inflation tick higher, and that may reignite some nerves. But, we don’t think it’s enough to offset the larger trend of cooler prices. Rent prices still have a lot of progress to make, and softer wage growth should help temper inflation in other core services (like education and hospitality) that have been especially sticky.

We’re seeing some signs of this already: The rate of those voluntarily leaving their jobs (the quits rate) has fallen back to where it was before the pandemic. And just this week, Walmart, which is the largest private employer in the world, said it's cutting pay for some entry-level workers.

What to watch: Looking to next week’s U.S. Consumer Price Index (CPI) print, a bigger headline inflation number may dominate the tape, but the balance under the surface will be key. How much will disinflation leaders reaccelerate? And how quickly will sticky pockets come back down?

2) The Fed: Will it signal rate cuts?

The debate around “is the Fed done?” seems exhausted. Whether the U.S. central bank pauses or has another hike left, the market’s expectation for the Fed’s “terminal” rate has hardly moved all summer.

The real question is how long a pause might last, and when and how quickly policymakers can start cutting rates. Just two months ago, investors were betting on Fed funds finishing 2024 around 3.75%; now, that stands around 4.40% (suggesting 65 basis points fewer cuts than before, with the first cut not coming until summer).

There’s some reason to believe it could potentially be on the earlier side. If inflation continues to cool at the same time the Fed holds rates, this means the real policy rate (the nominal policy rate minus inflation) is getting more restrictive without the Fed doing anything at all. That means just to keep rates as restrictive as they are today, the Fed would need to cut.

What to watch: The Fed’s 2024 dot at its meeting on September 20th. Right now, it’s at 4.625%, signaling even less cuts than the market.

3) Earnings: The push of costs vs. the pull of demand

The latest earnings season was better than expected, and the Street sees even greener pastures ahead: Expectations for S&P 500 earnings for the next 12 months are pretty much back to where they were last summer. To us, such strong earnings make otherwise full valuations for stocks look worth it.

It is not possible to invest directly in an index.

But there are still risks. The Fed’s latest Beige Book, which surveys dozens of district banks, noted that more companies seem to be struggling to pass their own costs onto their customers.

What to watch: Stronger earnings are surely welcome, but margins (which measure the degree to which sales become profits) also matter. Seeing margins stabilize (after declining steadily since 2021) could offer an encouraging sign.

It is not possible to invest directly in an index.

4) Capex: Can momentum continue?

The U.S. economy’s strong showing this year has been partly in thanks to government policies focused on reviving America’s industrial heartbeat – together, the 2021 Infrastructure Investment and Jobs Act (IIJA), the 2022 Inflation Reduction Act (IRA), and the 2022 CHIPS and Science Act (CHIPS) include almost $2.4 trillion in funding.

Now, that, combined with ongoing reshoring and investment in the energy transition, is translating into real company spending on infrastructure, AI, and the like. Rounding out Q2 earnings season, over 60% of S&P 500 companies increased capex over the last year. Can more join in?

Why it matters: There’s a big debate over whether all this capex is a sign that the economy might be getting more productive. If it is, it could level-up future growth.

5) Washington: Is there risk of a government shutdown?

Congress has to pass a short-term spending deal (a “continuing resolution”) by midnight on September 30th to keep the government’s lights on. The House comes back from its summer recess on September 12th, leaving just about three weeks to get an agreement in order.

Without it, all “nonessential” departments – like the Environmental Protection Agency, the Labor Department, and parts of the IRS – will be forced to power down. In essence, the government “shuts down.”

We’ve seen a handful of government shutdowns before, with the longest in 2018 (which lasted over a month). But, while the impact grows the longer it lasts, the hit to growth and stocks is typically short-lived. Looking at the last 20 government shutdowns (from the time they started to ended), U.S. stocks have actually been about flat on average.

Past performance is no guarantee of future results. It is not possible to invest directly in an index.

What to watch: A deeply divided Congress makes things more difficult, and some policymakers seem to be demanding concessions before approving a plan.

Investment implications: We still see the potential

At the start of the year, we asked investors to see the potential for stronger markets, and so far, even amidst a flurry of risks and bouts of volatility, that’s tracked.

Global stocks are up +15% year-to-date, while global bond returns (-0.6%) have been tougher as yields have climbed. But together, a 60/40 portfolio has returned almost +10% – well above the 7.2% annual return our Long-term Capital Market Assumptions (which estimate returns for the next 10-15 years) would typically expect.

Past performance is no guarantee of future results. It is not possible to invest directly in an index.

To us, that means the 60/40 is back, and today’s market offers an opportunity to rebuild and strengthen your core for the months ahead.

Your J.P. Morgan team is here to help.

All market data from FactSet and Bloomberg Finance L.P., 9/7/23.

DISCLOSURES

Small capitalization companies typically carry more risk than well-established "blue-chip" companies since smaller companies can carry a higher degree of market volatility than most large cap and/or blue-chip companies.

International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.

Diversification does not ensure a profit or protect against loss.

The 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 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 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 MSCI World Index is a broad global developed markets equity benchmark designed to support: Asset allocation: Consistent, broad representation of the performance of developed equity markets worldwide, without home bias.

The Bloomberg Aggregate Bond Index or "the Agg" is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

The NYSE FANG+ Index is an equal-dollar weighted index designed to represent a segment of the technology and consumer discretionary sectors consisting of highly-traded growth stocks of technology and tech-enabled companies such as Facebook, Apple, Amazon, Netflix, and Alphabet's Google.

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