Our Top Market Takeaways for October 27, 2023

Turbulence. This week has been another one of swings. Heading into Friday morning, the S&P 500 looks to wrap up in the red, with big tech feeling much of the pain. The S&P 500, Dow and NASDAQ are all trading below their 200-day moving averages – a sign that stocks may have broken down from their recent uptrend. At the same time, 10-year Treasury yields breached 5% for the first time since 2007 on Monday, going on to whipsaw wildly throughout the week.

The irony is that all this angst comes as economic growth and earnings have actually improved. So do bears have unfinished business?

Taking stock: What does the data say?

The latest read on U.S. gross domestic product (GDP) showed the economy grew 4.9% in Q3 – its fastest clip since 2021. The strength was pretty broad-based, with particular power from consumer spending (which accounts for more than two-thirds of economic activity). That stronger growth didn’t come at the expense of more painful price pressures either, as the gauge’s underlying inflation read – core PCE – cooled more than expected during the quarter.

This chart shows historical U.S. quarterly GDP on an annualized basis starting in 1Q21 and ending in 3Q23.

At the same time, by the numbers alone, Corporate America is translating that growth into profits. Almost half of S&P 500 companies have now reported Q3 earnings, and of those companies, roughly 77% have beat the Street’s estimates. What’s more, they’re beating those estimates at a heady 8% clip. Through both lenses, that’s about in-line-to-slightly-above the 5- and 10-year averages.

In all, Q3 is currently expected to generate about 2.5% earnings growth – the first quarter of growth after three straight quarters of contraction.

So what’s the problem?

All that’s good news, but it’s old news – Q3 is done and dusted, and investors seem more concerned with what will happen ahead. As CEOs and CFOs weigh in on what they’re watching in future quarters, more are waving red flags and noting pressure from “macro headwinds” such as higher interest rates, slowing demand and sticky inflation.

That attitude is reflected in the price action. Investors are punishing misses more and rewarding beats less than they typically would. In all, more than 60% of companies that have reported so far have seen their shares slide after announcing results.

Big tech is case in point. Meta just posted its most profitable quarter ever (since it went public over a decade ago), but it’s having one of its worst weeks of the year, given a more cautious outlook for the quarter ahead. Alphabet likewise saw its worst day since 2020, as investors latched onto word of weaker-than-expected cloud revenue rather than overall better-than-anticipated profits and sales.

Markets are confronting the risks.

This brought stocks to depressed levels and bond yields to cycle highs. In all, markets seem to be pushing back on the idea that everything is rosy and fine. And to be fair, it’s not. There’s no denying there is plenty to worry about – from ongoing tensions in the Middle East, to “higher for longer” central bank policy and its effects, to large fiscal deficits, to consumer pressure points.

Awareness is important, but markets may be reflecting a more dire outlook than we see. Growth stands to slow, but that’s very different from calling for an all-out stop in economic activity. For instance, the consumer may start to spend less and switch to cheaper brands, but for the most part, everyone who still wants a job has one. This dynamic is actually key to a soft landing, which requires not an acceleration in growth, but enough of a slowdown to ensure inflation pressures can make the last mile of progress.

Stocks and bonds also seem to be anchoring on different data, and at some point, that should become self-reinforcing. For instance, as Corporate America telegraphs slowing momentum, this also implies bond yields should fall from their high levels. That, in turn, should feed back into a clearer path for stock valuations and future earnings.

We may be in an air pocket of discomfort, but the more markets anchor on pessimism, the better the potential for future returns.

Finding focus: Investing in a world in transition.

When markets are volatile, it can help to re-focus on what you want from your portfolio in the long run. The world is in transition – from pretty much any lens you look: the economy, policy, world order, technology and climate. Navigating that uncertainty can be overwhelming, but it can also be empowering.

That’s one of the key takeaways of the recently published 28th annual edition of J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions (LTCMAs), which represent the work of more than 60 investment professionals from across J.P. Morgan Asset & Wealth Management. They scrutinize over 200 asset and strategy classes to provide return outlooks over a 10- to- 15-year investment horizon. These annual outlooks help to drive our strategic asset allocation and power the tools we use to build portfolios tailored to your goals.

To build a smarter portfolio – one that can help seize the opportunities while mitigating the associated risks – we suggest that you consider taking steps to:

  • Extend out of cash and delve deeper within core assets: Cash rates may be high today, but historically, every major asset class has performed better than cash over our 10- to- 15-year LTCMA investment horizon.
  • Expand the opportunity set, especially with alternatives: Think real estate, infrastructure, private equity and hedge funds. These asset classes can help protect against inflation and provide portfolio diversification benefits.
  • Enhance outcomes through alpha: Given a world with a higher cost of capital, dispersion may rise, and manager selection can play an increasingly important role.

Your J.P. Morgan team is here to help you think about how to build a smarter portfolio for a world in transition.

All market data from FactSet and Bloomberg Finance L.P., 10/27/23.

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