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Our Top Market Takeaways for June 2, 2023

Market update: June in bloom

June is off to a sunnier start after a cloudy spring:

  • After a whole lot of flurry, the debt ceiling is pretty much resolved. Both the House and Senate have passed the Biden-McCarthy deal.
  • The labor market is still red hot (today’s job report blew past estimates), but inflation is showing more signs of decelerating. ISM’s manufacturing prices paid index declined meaningfully in May. Prices in the euro area also cooled.
  • And after a string of lackluster data, a read on Chinese manufacturing activity started growing again. Rumor also has it the government is mulling new support for the property sector.

In all, the S&P 500 looks to notch a gain on the week, even with questions over the Fed’s next move. And while the stock rally is broader than meets the eye, there’s still no denying that big tech has been a powerhouse. NVIDIA made it into the exclusive $1 trillion market cap club this week, joining the ranks of Apple, Alphabet, Microsoft, and Amazon. The stock is now up an eye-popping +175% just this year – making it the best performing company in the S&P 500. Those five stocks also account for +8.7% out of the S&P 500’s +10.7% year-to-date total return.

In today’s note, we dig into the tech hype, and what it might tell us about where markets are heading.

Spotlight: The tech hype

For all the buzz, it’s also important to keep the gains in context: A wider lens shows tech has just been playing catch-up to the broader market after a really ugly 2022:

What lessons can be learned from big tech’s big reversal? And can it keep going? Last week, J.P. Morgan hosted its 51st annual Technology, Media and Telecom Conference, where we heard straight from the key players. Here is what we took home:

Companies are focused on costs – but that can be a good thing.

The recession obsession has been in play for over a year, and companies have used all that time to prepare. Part of tech’s reckoning was a serious retrenchment, refocusing spending and leading the rest of the economy in layoff announcements and other cost cuts. Through it all, tech went through several quarters of negative earnings growth; but now, expectations are rising again, the sector is leading broad market earnings revisions higher, and margins are higher. And that’s all as the recession still hasn’t hit.

Our take: Tech’s tale can teach us a few things about where the broad market might be heading. For one, expectations are powerful and can empower C-suites and investors alike to get ready for what’s to come. Moreover, different industries can correct at different times, enabling the stock market at large to march on even as the macro road grows more challenging. That’s not to say it’ll all be smooth sailing from here – we expect volatility. But, we do think it means that 2022’s bear market is bygone. The market is not the economy.

Consumers are still healthy.

Payment bellwethers like Visa, Mastercard and PayPal all called out a strong consumer. That tracks with last week’s read on consumer spending, which jumped 0.8% in April – up from 0.1% in February and March and outpacing inflation. Americans shelled out for travel, concert tickets, and even big-ticket items like vehicles. Q1 earnings reports from retailers echoed that strength but also warned of challenges ahead.

Our take: If you have a job and a steady paycheck, why stop spending? There’s still 1.8 job openings available for every unemployed American, and wages are growing over 4% year-over-year. But, initial signs suggest consumers may be getting a bit over their skis, now spending more than they’re taking in each month. With excess savings dwindling to about $1 trillion (from $2.5 trillion zenith), many are turning to debt to keep spending as usual. At some point, the rubber may meet the road.

The AI hype is real, and it’s here.

Name a buzzier buzzword than “AI.”

You’ve probably heard: Generative AI is creating art and music that sound like your favorite bands. Large language processing models (LLMs) like ChatGPT are completing tasks in a fraction of the time it’d take humans, from passing a U.S. medical licensing exam to beating seasoned stock-pickers. ChatGPT has reached 1 million users more quickly than any other application.

But what’s more, companies are already monetizing it. Last week, semiconductor stalwart NVIDIA bested earnings expectations by almost 20%, and that’s not all: the company raised its Q2 sales guidance to $11 billion – a staggering almost $4 billion ahead of consensus as the AI boom fuels chip demand.

Our take: We see a lot of value in AI, too. AI is creating new profit pools for the tech sector, and investor interest only seems to be growing. Many companies can benefit, across the value chain – from semiconductors and hyperscalers to data infrastructure and consumer applications. There may be pain points ahead (from output accuracy to data privacy), but the opportunities are immense.

Investment considerations: So are we in a bull market now?

Maybe. At the very least, we think the worst is over for stocks. To be sure, questions over regional banks, sticky inflation and full valuations could trigger sell-offs... but, at the same time, corporate profits have been solid, earnings expectations are now ticking up and positioning remains fairly light. To us, that means sell offs are buying opportunities.

Tech’s ascent may also need not be a bad thing. We think the rally broadens from here, even as growth slows. While we’re believers in the next wave of digital innovation, we’re also focused on themes like dividend growth, the energy transition and the real economy. Small and mid-cap stocks can complement large cap holdings, and opportunities also look ripe in Europe and China.

For more, stay tuned for the release of our Mid-Year Outlook next week.

All market data from FactSet and Bloomberg Finance L.P., 6/2/23.


All market and economic data as of June 2, 2023 and sourced from Bloomberg and FactSet unless otherwise stated.

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

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.

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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.

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All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

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