Trading insights: "Staying positive, though markets could be choppier" 

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John Schlegel: Welcome to 'Market Matters,' our market series here on J.P. Morgan's Making Sense. Hi, I'm John Schlegel, head of the global positioning intelligence team here at J.P. Morgan. Today, I'm glad to be back with Andrew Tyler to discuss the potentially changing macro landscape and its impact on markets. As a reminder to our listeners, Drew is head of the global market intelligence team and has had some great calls on markets in the past, including turning bullish on U.S. stocks as of late April this year, after being more cautious starting in early-March. So I'm really looking forward to hearing the latest thoughts from Drew. Drew, great to have you on this podcast.

Andrew Tyler: John, great to see you. Thanks for having me.

John Schlegel: So Drew, here we are on Monday, August 4th. We just got through a very heavy catalyst week with key earnings, macro data, trade and tariff headlines. And so, what do you make of it all? Are you still as bullish on U.S. stocks as you have been in the past?

Andrew Tyler: So taking a step back, our bull case had been predicated on three pillars, so to speak. So one is resilient macro data. Two is going to be positive earnings growth. And then, three is going to basically be a thawing of the trade war rhetoric. And so, we had been, let's call it, a 10 out of 10 bullish over the last couple of months. I would say, we're less than that now. So maybe a 7 and a half or 8 out of 10, to the points that you had just made. And so, digging into those a little bit deeper, I would say, the non-farm payrolls number is the thing that's probably shaken the most confidence within this. And for just as a recap there, what we saw was basically 75,000 jobs added the previous month, but it was really the revisions. You had about 260,000 jobs decreased or removed from basically the previous forecast. And that's really what got markets a little bit scared for a few good reasons. So one of the things too that was maybe masked while we were focused on that was the strength of the earnings. And so, right now, the S&P with about two thirds of the companies having reported we are on pace for another double-digit earnings growth quarter, which is pretty strong. And then, the last piece is that the president had put out a number of new letters to trading partners, about 60 countries. And so, now we have a stronger handle on what the average tariff rate is going to be. It's about 15, 15%, which is a little bit higher than it was obviously last year, but lower than expected. And I think, ultimately, it's going to be a positive for markets.

John Schlegel: That's great, Drew. On the points that you mentioned though resilient macro data, positive EPS growth, improving clarity around the trade war. Beyond some of the earnings that did seem like it got masked in the macro data, is there anything else you think the markets are missing at this stage?

Andrew Tyler: Yes, absolutely. And I think it is going to be tied to the M&A environment, the IPO environment, and then stock buyback. So I think all three of those are just another place of just incremental demand for U.S. equities, as we have a scenario where the economy is certainly slowing but it's not going to go into recession. Earnings are still extremely strong, and now that we have clarity on the trade war, there's obviously a couple other countries that we need to get sorted, but I think we have a pretty good handle on what the outcome is here.

John Schlegel: That's really interesting. And I think, the overall backdrop that you mentioned jives a bit with what I'm seeing from the positioning side. And, just for brevity's sake, I would say, we think clients got moderately bullish. I wouldn't say they got to 10 out of 10. But, if we think about the aggregate level of positioning, it did turn more positive over the last few months after being very light in the early-April period, no surprise there. But I think what this is shaping up to me to look like is somewhat of a repeat of the last couple summers where you saw a bit of weakness following, especially if you go back to two years ago we had some of the concerns around the regional banking crisis. There was a lot of bearishness, that then flipped to a bit of bullishness due to some of the semis and AI trades that worked out really well, and that led to then short covering. I think the interesting thing we're starting to see in the last week or so is that short cover bid has dissipated quite a bit. And so, I think the overall view on the market is, it could be a little bit choppier, maybe a little bit of weakness in here as people reenter some of the shorts, but not clear that clients took last Friday's data to be a game changer in terms of how they're actually positioning. So we'll have to see how that evolves. Getting into a bit of the themes, I think, AI, and cyclicals, over-defensives have been some of the key things that you've focused on. How are you thinking about those themes at the moment? Any changes to those views, or things you would emphasize even more perhaps, given last week's earnings?

Andrew Tyler: Absolutely. So let's start with AI and tech. So I think when you look at things such as the earnings that we had last week, it really reignited that AI trade and you've seen this across a number of sectors, whether it's the so-called magnificent seven, whether it's utilities, whether it's Chinese tech companies, whatever it might be, we're still seeing a lot of strength, or at least a lot of indicated strength, I would say, in those themes for sure. And I would just reiterate that. To us, it is one of the things that continues to be what we think is the gift that keeps on giving. What I mean by that is these are companies that are still spending a tremendous amount of money, like hundreds of billions of dollars. And that is going to play out in terms of how we see build out data centers, how we think about cloud computing, how we think about AI, and this adoption rate. I think it's all going to be a strong tailwind that's there. Aside from that, I would just say, the concept of U.S. exceptionalism is still one of these trades where in the early part of the year we saw this reversal of this, as illustrated by the extreme outperformance of Europe over the United States, the strongest in 50... A half hundred years. And now, I think it's reversing a little bit, but why? So I think part of it is that U.S. GDP growth continues to outperform the rest of, let's call it, its top 8 or 10 peers. Earnings growth for sure remains better than expected. And I think all of that's going to matter in terms of how we think about the flow of assets over the next one to two quarters.

John Schlegel: So to sum it up, you're still quite bullish on AI, but from a cyclical standpoint, how are you feeling about that? The U.S., you mentioned, is still growing more strongly than other countries regions. What are thoughts around that?

Andrew Tyler: To use a baseball reference, we think about this in terms of what inning are we in. So the closer we are to the end of the game, the less that cyclicals tend to work. So what I mean by that is cyclicals work best in an economy that's expanding, but in the early part of its expansion. We appear to be in the late stages. So while I still think elements of cyclicals, whether it might be financials or industrials, can still work over the next one to two months, I think longer term, so if you're an investor that has a much longer time horizon, it's going to be a bit more challenged. Because again, the calls for a recession in 2026, I think that'll become a consensus by the time we get to year-end.

John Schlegel: Interesting. Yeah, I think one of the dynamics that we're starting to see play out is that there had been a shift towards more cyclicals in the way clients were trading the books in the last month or so. And now, some of the things, I mean, in particular, I would mention utilities as a group that could perform a bit better, especially if rates are a little bit lower. The AI trade still benefits that sector as a whole, positioning seems pretty light. So we will see how this plays out, but that's one that I'm keeping my eye on for what it's worth. And then, maybe going into the next month or so, there's a lot of catalysts. I think most of us were maybe hoping for a little bit of a quieter August period, but it doesn't seem like we're going to get it. So whether it's CPI next week or you got some key earnings from semis in the later portion of the month, you've got Jackson Hole, and then following up next month, you've got NFPs again. What are some of the key things you'll be watching for in these catalysts? And, is there anything in particular that you think could really change your view from this 7, 8 out of 10 bullishness to something either much more positive or more negative?

Andrew Tyler: Absolutely. So I would start with CPI, because I think really the question that everybody's trying to answer from the trade war is, number one, "What does the inflationary impulse look like? What does its size, when does it proliferate itself?" And, for right now, I would say that the expectations are that it's mostly the fourth quarter of this year where you're going to see that price increase hit the most strongly. If we're wrong about that and it happens sooner, then that would be something that would make us a little bit more bearish. Now, alternatively, when we think about next month's non-farm payrolls, if we see jobs accelerate higher, then probably means that we're going to see less likelihood that the Fed does something in September. And that would be a positive for stocks in my view. And then, again, referencing baseball again, rather than feeling like we're in the eighth inning, maybe it feels like we're in the sixth inning. And then, things such as cyclicals would probably work a little bit better in that environment.

John Schlegel: Got you. Yeah, no, I think CPI will be quite interesting from my perspective as well, given, as I mentioned, there was decent bit of covering of shorts. You've seen the meme stock rally and themes that are tied to more of the retail investor pick up a lot. And I would say there's a lot of professional investors that are a little skeptical on some of those stocks and think that they could reverse a bit. And so, if inflation were to show sides of picking up, then there may be more of a green light that, "Okay, this stuff has gone a bit too far and we can actually press a little bit more." So I think that will be one of the biggest catalysts over the next month. And just to note for our listeners, there'll be a podcast covering the CPI report from Bruce Kasman, our chief global economist, next week, covering the report in its details. So we're just finishing up, I know we've spoken mostly about the U.S., but given your global mandate, are there any other regional views that you'd like to mention at this point where something interesting is happening?

Andrew Tyler: So I would say that keep an eye on the strength of the U.S. Dollar, because we had a situation where over the last couple of weeks the dollar had started to appreciate again, which puts a little bit of a headwind on international and emerging market equities. It now looks like it's going to reverse and move a little bit lower from here. And if we do see the Fed's act to cut rates in September, the dollar will move even lower. So then, the non-consensus trade would be to look at emerging market stocks. Now it's not as easy as, "Just here's a blanket. Just buy all of them." Although there are ETFs that can do that. I would just say that for some of the countries that are a little bit more tied to commodity exports are going to be a little bit more difficult to, I think, see go higher. But then, those are that maybe have a little bit stronger of an internal consumer impulse, so maybe a little bit more like a Brazil would make some sense. But then also too, the trade war matters here as well. So if we saw the U.S. and Mexico decide to have a 90-day delay to have the tariff talks, and then locked in a lower rate. If we did see in the interim they moved that rate even lower, then I think Mexico goes higher on the backside of that.

John Schlegel: And anything on Europe at the moment?

Andrew Tyler: Oh, absolutely. And so, I think, on Europe what we're seeing is on a relative value basis, the U.S. looks a little bit more attractive and the main reason for this is the U.S. and European tariff rate is a little bit higher than expected at 15%. That creates a new headwind of growth for Europe that didn't previously exist. So you combine that with what so far has been a pretty unimpressive earning season for the European companies, and I think you compare that to the U.S. on track for double-digit growth. It puts more money in the U.S. So I think that trade probably has a little bit more room to run from here.

John Schlegel: Yeah, no, I think that's been one of the fascinating dynamics throughout the years, the whole flip-flop between U.S., and then Europe, back to the U.S., and how long does that last? But I would agree, Europe doesn't seem like it's in a great spot at the moment. And, even from the positioning side, there could be a little bit more weakness on a relative basis to the U.S. So Drew, thanks again for joining me on this podcast. It's been great chatting with you.

Andrew Tyler: Absolutely. Thanks for having me, John.

John Schlegel: Awesome. Well, thank you also to our listeners for tuning into this bi-weekly podcast series from our group. If you have feedback or if you'd like to get in touch, please go to our website, jpmorgan.com/market-data-intelligence where you can send us a message via the contact us form. And with that, we will close. Thank you.

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