Equities are back to all-time highs — what’s next?

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Eloise Goulder: Hi, and welcome to Making Sense. I'm Eloise Goulder. And today I'm delighted to be joined by Andrew Tyler and Federico Manicardi from our market intelligence team to discuss equities following the very sharp rally in recent weeks, with US equities now surpassing all time highs. So Drew, Fede, thank you so much for being here.

Drew Tyler: Thanks for having me.

Federico Manicardi: It's great to be here.

Eloise Goulder: So Drew, we've seen this very sharp rally back in global equities over the last three weeks or so, with the S&P 500 up over 10% over that period. So can you give some context on this? What have been the drivers?

Drew Tyler: Absolutely. So before I kind of jump into the drivers of that, I kind of wanted to touch on why we saw the pullback in the first place. So the S&P 500 fell about 8%, peaked a trough. And the major driver of that was basically the Mideast conflict that we've seen. And it really is the closure of the Strait of Hormuz, which is responsible for about 20% of the daily global volume of oil. And that triggered oil prices to go higher, a spike in volatility, and then a decline in equity prices. Further, as people started to have concern about recession risks, that was another impetus for people to sell out of stocks. Now we've seen the S&P retrace more than 100% of its losses. And as you mentioned, it's now at all-time highs. So the biggest driver here has been an ending of the kinetic hostilities between the United States, Iran, as well as Israel. And then with all sides moving towards a ceasefire, we've seen a very sharp rally, as you just mentioned. And it's really the equity markets deciding, yes, there's been some disruptions to the global supply chain. No, this is not going to be a longer-term problem. And then now we're going to start to look towards a return to fundamentals.

Eloise Goulder: So we're moving to fundamentals. And on that basis, what's the picture looking like? And what are your views from here?

Drew Tyler: Let me break this up into two baskets. First is going to be macro, and the second is going to be earnings. On the macro side, the US looks pretty strong. And this is going to be a combination of the strength of the consumer and the strength of corporate balance sheets, as evidenced by a very low unemployment rate, increased spending, and then also a GDP projection that remains at or above trend levels. Shifting gears and thinking about earnings, Q1 earnings are expected to be very robust. So right now, expectations for about 12% to 13% earnings growth, based upon about 9.5% to 10% revenue, with margins about 13%. All of these represent very, very strong numbers historically.

Eloise Goulder: So the macro and micro are both holding up, and that's leading you to have a bullish view overall. But what segments of the market do you believe will lead?

Drew Tyler: So I think from here, you really need to look towards the technology sector as well as the financial sector. And so we've already seen the financial sector start to report, and this is the large banks, and they've all done very, very well. And the outlook there remains positive, with corporate management pointing to, again, the health of the consumer, a healthy loan book, and then markets activity very strong on the go forward.

Eloise Goulder: So tech and financials are the key segments you expect to lead. But how much is this already in the price?

Drew Tyler: So I would say not at all, right? And so the reason why I say that is we kind of look at the technology sector, it's really gotten cheaper over the last three to four months. And when you think about valuation, think about this price earnings perspective, and it's really the earnings, both realized and earnings expectations that continue to ramp higher that make the segment look cheap, quote, unquote. And so when we kind of think about this on like a five-year look back, the sector is really trading almost one standard deviation below the mean. And one of the major drivers of both revenue and earnings continues to be AI. And what we have seen from international earnings so far is robust global demand for AI that does not appear to have any end in sight.

Eloise Goulder: And Drew, you've mentioned that the macro economy and the micro earnings are holding up fine just now. But what about the consumer? Because I'd imagine that higher energy prices, higher gas prices is both inflation positive and potentially growth negative via the consumer channel. So what are your views on that?

Drew Tyler: Yeah. So first, I would say about this is when we look at the consumer, we kind of look at consumer cash levels. And so what I mean by that is like looking at the combination of check-ins accounts, savings accounts and money market funds. And what we find is that on a nominal basis, that's at a record high for U.S. consumers. And so while there very much is the narrative of the K-shaped consumer and the K-shaped economy, what we are seeing is actually an acceleration in spending as evidenced by the credit card companies year to date. And we think that as long as unemployment rates remain steady, the consumer is going to hold up just fine. And so while those sectors have some headline risks to them, we think that they're going to perform very well. But we just have a preference for tech and financials.

Eloise Goulder: And of course, as global equities have rallied, we've also seen a sharp increase in positioning. We've seen net buying from a combination of hedge funds, including CTAs, across ETFs and from the retail investor. And our aggregate tactical positioning monitor has gone from depressed levels back to roughly neutral levels at this stage.So over to you, Fede. So international equities were a relative outperformer through the back end of last year and through January and February this year. Asia and Europe really outperforming the U.S. and there was a narrative around the broadening of the rally. So Fede, what were the drivers of this outperformance?

Federico Manicardi: I think there was a mix of drivers between the outperformance. Investors going into 2026 were looking at an acceleration in global GDP growth and earnings momentum on the back of favourable liquidity tide and monetary and credit impulse. As central banks weren't seeing as impediment going into 2026, global fiscal stimulus has been very strong in the U.S., Germany and Japan, and also the AI spending. At the same time, valuation for Asian and European equities were close to record high discount to the U.S. back in October, and often we hear investors talking about diversification needs. Foreign holdings of U.S. equities increased substantially post-GFC, dollar headwinds are generally flagged, and there were concerns around concentration risks in U.S. equities.

Eloise Goulder: So many reasons why rest of world equities were outperforming the U.S. over those months into February. But Fede, how many of those arguments still hold up today? And what are your views today?

Federico Manicardi: We remain constructive on international equities. We see reasons to expect a negotiated settlement outcome to prevail. And we think that the macro impact of growth and inflation will only be modest given the time it will take to resolve the situation. So we generally remain tactically bullish on international equities. I think positioning, fundamentals, earnings are all reasons behind this. However, I think our view is a little bit more nuanced right now. We would keep a preference for Asia and for E.M. as the dollar should probably resume to trade software. Earnings growth should remain solid and flows into E.M. have already come back. Meanwhile, we would keep a bit more defensive on Europe. Absolute valuations aren't attractive anymore. And the relative valuation argument to the U.S. is much less compelling when you adjust for index sector composition. At the same time, we haven't seen structural flows coming back from hedge funds and also real money. And I think this is important because it comes after almost an entire year of structural inflows in European equities from European investors

Eloise Goulder: And indeed, if you look at European indices, they did underperform throughout March and they haven't yet hit fresh all-time highs, unlike U.S. equities. And presumably this is also a function of the macro headwinds facing Europe, particularly as a result of the Middle East conflict and higher energy prices.

Federico Manicardi: Yes, European equities are generally underperforming on energy shocks and stagflationary period. And our European economics team has already taken the numbers down. They also note signs of software U-momentum preceding the start of the conflict across household spending, labour market and IPs. So we do think that the full effect of the energy price shock should still be felt.

Eloise Goulder: So Fede, which pockets at this stage do you expect to lead?

Federico Manicardi: Like we said, the regions within international equity are going to be a bit more mixed compared to October. But as far as investable themes are concerned, we think that some of the previous winners will keep working. In Europe, I think about banks, AI facilitators like electricals and semi-cap equipment, pharma and German infrastructure. In Asia, I think it's very clear that AI bottlenecks and the whole AI supply chain are going to keep working, machinery, ESS and also robotics. But I think there are also themes that were popular before and now they've been strengthened. First of all, there is going to be an accelerated case for renewable and grid modernization as security considerations make these themes at least as important as defense for an energy importer. Modern warfare is also going to change as cheap drones have permanently altered the economics of conflict. Finally, there is going to be a lot of focus on oil infrastructure versus exploration and production as rebuild and urgency of expanding pipelines to mitigate the risk of further Hormuz related disruptions have gone up.

Eloise Goulder: We're also coming to Q1 earnings in Europe and Asia. Fede, what are your expectations for this?

Federico Manicardi: I think earnings are staying resilient and provide another sort of support to the equity market. On aggregate, earnings projection for 2026 have actually continued to go up during the conflict. And it is just for the US, but also for other places like Europe and Asia. If we break down the thematics that have been driving earnings up, though, it has been mostly energy, but also some of the sectors that I mentioned earlier, like semis, minings, banks, and industrials. When we think about consumer discretionary stock, they will likely show up mixed numbers and soft guidance because the full impact of the oil shock is actually going to still be felt and has to work through the numbers.

Eloise Goulder: That's really helpful. So the bottom line is, Drew, Fede, you're bullish global equities but when you think about the leaders, there are some areas of prior strength that you expect to continue, for example, Asia, the Asia supply chain, Asia robotics, and Asia ESS energy storage systems outperforming, but also pockets of the US outperforming, including financials. Having said that, there are some areas where you do expect a change versus the prior playbook. In the US, tech was a laggard for six months or so going into the conflict. And now at this stage Drew, valuations on a relative basis have come down and you expect it outperform. Equally, Europe had been an outperformer over the last three to six months. But Fedde, at this stage, you're more worried about the macro vulnerabilities, and it's just certain pockets of Europe you're expecting to outperform at this stage. So before we close, could we talk about the risks? Drew, what are you most concerned about?

Drew Tyler: Absolutely. So in the US, I would highlight three key risks. First is going to be a resumption of the kinetic conflict in the Middle East. Second would be AI exhaustion. And third is inflation. It's that third bullet point that I'd like to expand on. Because due to the closing of the Strait of Hormuz, a few things that people need to be aware of. First is going to be the oil and energy price shock. Second are going to be increases in food prices. A lot of this comes from fertilizers and that lack of supply that's there. I would also highlight issues with manufacturing due to helium shortages. And that impacts things like chip production, as well as things like MRIs within healthcare. And then lastly, I would just say is we've got to look at things that help metal manufacturing. So, for example, sulfur and sulfuric acid, which is used to refine copper. And copper is used in virtually everything. All of this points to a potential for another inflation peak, which won't necessarily mirror what we saw in 2022, where US inflation hit 9.1%. But going from maybe 3.5 higher, it's certainly in the cards from here. With regards to timing, because the US has been relatively insulated in its role as an energy producer, as well as kind of its geographic isolation, this is a phenomenon that we would anticipate coming to fruition sometime in May, which would then basically be expressed within the June data.

Eloise Goulder: And Fede, over to you. What are the key risks you're watching?

Federico Manicardi: On the downside, I would echo what Drew said. The risk of a new inflation wave and associated disorderly moving bond yields is probably the number one. We've also talked extensively about private credit recently, but investors are generally recognising that this is more US-centric and it could also lack the size to be a truly systemic event. On the upside, though, I think things are interesting as well. For Asia, I think changes to the macro outlook for China could be quite impactful for international equities. Q1 GDP was a beat. And even if the recovery still looks more policy-tilted, production-led and export-reliant, tier one property prices are now rising month on month. And our property analyst in Asia is talking about organic improvement in house sales. I would argue that a China cyclical recovery is not yet in anyone's base case. When we're thinking about Europe, it will be changing odds around the Russia-Ukraine ceasefire. And the odds have probably increased after the election in Hungary and evidence that Ukrainian drones are now outpacing Russian ones.

Eloise Goulder: Thank you so much, Drew and Fede, for taking the time to sit down together here in London to talk through your views. It's certainly a very timely conversation with US equities surpassing all-time highs at this stage.

Drew Tyler: Oh, it's our pleasure. And thank you very much for having us.

Federico Manicardi: Thank you for having us, Eloise.

Eloise Goulder: Thank you also to our listeners for tuning into this Making Sense podcast. If you have questions or if you'd like to get in touch, then please do go to our website at jpmorgan.com/market-data-intelligence. And with that, we'll close. Thank you.

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