Trading Insights: What to watch in equity markets heading into year-end

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Eloise Goulder: Hi and welcome to ‘Market Matters,’ our market series on J.P. Morgan's Making Sense. I'm Eloise Goulder and today I'm really excited to be joined by my colleagues, Andrew Tyler and Federico Manicardi from our Global Market Intelligence team to talk about markets following a very interesting year. So Drew, Fede, thank you so much for being here today.

Drew Tyler: It's great to be here.

Federico Manicardi: Great to be chatting today.

Eloise Goulder: So let's get to it. On the face of it, it's been another very strong year for global equity markets with the U.S. S&P 500 now up around 15% year to date. And this, of course, follows two very strong years in each of 2023 and 2024 when the S&P 500 delivered more than 20% returns in each of those years. And it's been a strong year for both developed and emerging markets, because emerging markets as a whole have outperformed developed markets. MSCI EM is up nearly 30% year to date, and it's faring a bit of a comeback as EM had been weaker through 2023 and 2024. So Drew, can you start by explaining why you think global equities have been so strong as a whole this year?

Drew Tyler: So yes. So beginning with the U.S., three major drivers come to mind. First, a strong macro environment. Second, robust earnings growth. And third are lower effective tariff rates. There are other ancillary tailwinds such as corporate buybacks and the increasing role of the retail investor. But to give some context on these primary drivers, let me begin with the macro environment. So when we analyze the U.S. economy, we always begin with the consumer, because the consumer is nearly 70% of U.S. GDP. And what we have seen recently is a number of negative headlines regarding the consumer, specifically around debt levels. But what we find is that debt service, has been normalizing from the strongest point in U.S. history that we've seen in the 2021-2022 period, back to the 10-year trend. So while we believe that the consumer remains in a healthy position, we might find that over time, that there are challenges to this hypothesis based upon a deteriorating labor market. But in the near term there's not a flashing red light that this is a significant risk. Next, we think about the corporate sector. And here we find that the corporate sector remains very strong, coming off of its historically strongest point, again, in the 21-2022 time period. So lastly, when it comes to the tariffs, we have seen that the U.S. administration continues to reduce or remove these tariffs through a series of discussions. And we find that the average effective tariff rate continues to decrease as we've traveled throughout this year. And we do anticipate that that trend to continue into 2026. Now, if you combine these three drivers, this has resulted in an economy that continues to grow above trend. And as a reminder, trend growth is estimated to be about 1.9% to 2% real GDP. And what we've seen in the U.S. is since 2022 second quarter, U.S. real GDP has grown about 2.7% versus the long-term average of just under 2%.

Eloise Goulder: And you mentioned the strength of both the retail investor and corporate buybacks in supporting U.S. equities this year. And I think those are really critical points because when we look at positioning, the retail investor has been a very key net buyer of U.S. equities ever since the market drawdown of April, in fact. But Drew, turning away from the U.S. and towards emerging markets, they've had an even stronger year to date. What do you think have been the key drivers for this strength?

Drew Tyler: With emerging markets, I think the story has really been a combination of a weaker U.S. dollar and improving earnings growth. So the first half of 2025 was the weakening dollar story, where the market narrative was about the end of, quote unquote, U.S. exceptionalism and the flight of U.S. dollar-denominated assets. That narrative overstates what has actually happened. The MSCI Emerging Markets Index outperformed the S&P 500 by 8.2% the first half of the year, but only by 2.7% in the second half of the year. These moves happened with the U.S. dollar proxied by the DXY Index, falling nearly 11% in the first half of the year. However, that same index gained 3.1% in the second half of the year. So, U.S. dollar gains tend to be a headwind for emerging markets equities, but we have seen earnings growth move from negative in the first half of the year to positive in the second half of the year, more than offsetting the dollar appreciation.

Eloise Goulder: Fascinating. So, we had the dollar decline at the beginning of the year, which was the first tailwind, and then we've seen strengthening corporate earnings in EM, which has been the second tailwind. So, that's a really helpful explain on what we've seen year to date. But recently, we've seen some gyrations, and in fact, the S&P 500 fell 5% peak to trough from late October into mid-November. Drew, what do you think caused this?

Drew Tyler: So, I think the two biggest drivers are, number one, a shift in the Federal Reserve rate cut expectations, and number two, I would say, anxiety around AI valuations. So, thinking about the Fed, it began with Chairman Powell's hawkish commentary following the October 29th Fed meeting. He really pushed back on the market's pricing of a rate cut for the December meeting. And so, what happened was that this caused the market to reprice that probability of a rate cut from about 99% on October 28th down to a low of about 35% on November 20th. Current market pricing is now back above 85%. Regarding AI valuations, some of the elements to this thinking include so-called revenue circularity, fears on our accounts' receivable growth, and most recently, fears over how hyperscalers use depreciation for chips.

Eloise Goulder: And it's worth noting when it comes to the retail investor again that our social sentiment indicator suggests significant weakness in retail investor sentiment through November, much of that catalyzed by a combination of the less dovish Fed and concerns about the AI trade as you articulate. So, when we try and put all of this together, what is your view from here? Do you believe the small recent pullback is really an opportunity to add?

Drew Tyler: Oh, absolutely. Yeah, so we are tactically bullish and we look for markets to rally into early 2026. So, we think that the tech sector continues to outperform, but we also think that there's going to be a broadening of this rally as we've seen the non-tech portions of the stock market look attractive. And when you look at the differential between the largest tech companies and the rest of the S&P 500, the earnings growth differential continues to narrow, which has typically been an indicator that it's time to see the rally broaden from here.

Eloise Goulder: So what are your highest conviction sectors at this stage?

Drew Tyler: Yeah, so we really like the idea of a barbell trade, and taking some of your assets and splitting them almost evenly between a couple of things. So first would be mega cap tech and the AI theme. And the other part of this, to take advantage of the reboot in economic growth, it's going to be cyclicals. Sectors that include banks, financials, materials, energy to a certain extent, but it's also to some of the consumer related sectors and subsectors, such as retailers, airlines or transports more generally.

Eloise Goulder: Thank you, Drew. So let's turn to Federico. Fede, you cover international markets, so Europe and Asia. And as I mentioned at the start, many of these markets have been even stronger than the U.S. year to date. How would you explain strength in these regions?

Federico Manicardi: It has been a hectic, but also a very exciting year. I think price and volume speak for this quite clearly. When we look at average daily turnover, we notice it's up 30 to 40 percent across Europe and Asia. Stock 600 is up 15 percent year to date, and most Asian equity indices are up more than 20 percent. In EMEA, the rally came in two phases. The first one, in the first part of the year, was driven by industrials and financials and came off the back of German elections, ECB cuts and Russia-Ukraine ceasefire odds improving. The nature of the catalyst was quite broad based and was also participation from rates, FX and, broadly speaking, across equity internals. After a pause, we saw European equities started to rally again in the second part of the year, but this time the rally was driven by laggards like healthcare, luxury and semis. APAC has generally outperformed Europe. However, there has been some dispersion across region. China's lost steam around late September and retail flows started to turn more cautious and the market rotate towards defensive and quality laggards on softer growth momentum. India has been one of the main laggards, but we started to see Nifty testing new all-time highs in November as macro, earnings and policy became more supportive. Meanwhile, Japan started to rally after a trade deal with the U.S. brought clarity on tariffs starting from July, but momentum then extended starting from October as the market digested a new fiscal and monetary mix under the new Takahichi leadership. Korea was actually the best performing market year to date and the rally was catalyzed by elections in June, but was later supported by momentum in governance reform, memory prices and other themes like nuclear and robotics. We've now seen some pressure coming in the market after October as retail flow dynamics have been more subdued.

Eloise Goulder: Thank you, Fede. What's your view from here?

Federico Manicardi: We're quite bullish and we believe that the global growth, inflation and policy trade-off will be supportive. And in a nutshell, we think that U.S. AI investments are set to continue at a rapid pace. China could show some green shoots of a turn up in the private sector and a Eurozone activity momentum is likely to improve, aided by better credit impulse and fiscal stimulus rollout. When we look at our favorite themes for next year, we like to combine a mix of winners and losers of 2025. So we like to mix banks and electrification plays as you see the trends remaining intact. But we also like to belong healthcare, mining and mining capex, luxury and renewables. In China, we think the market is in the early stage of recovery from a four year down cycle that started in 2020. Valuations remain acceptable and the recent underperformance offer a good entry point. When we look at 2026, we see multiple support factors. AI adoption with abundant power, innovation in robotics, biotech, semis and fintech, consumption and property support measures, domestic liquidity reallocation and of course, anti-involution helping margin. When we look at Japan, we think there are a few supportive factors. Corporate firms, normalization of tariff impact and Sun Anomics. Particularly the policy of the new administration should support inflation control, consumer demand, as well as strategic investments in AI semis, defense, energy and security. This backdrop is expected to stimulate corporate investment, government spending and personal consumptions, driving further economic normalization as well as supporting the equity market. Finally, when we look at India, corporate earnings are set to rebound on the back of supportive fiscal and monetary policies, recovering domestic demand and broad-based sectoral growth. Meanwhile, YEM-dedicated investors are underweight India after underperformance in 2025.

Eloise Goulder: So overall, you're both bullish global equities going into the end of this year and into early 2026 on account of a favorable growth policy outlook across many economies and also a robust corporate earnings cycle. And you have many trade ideas across the U.S., Europe and China, Japan and India. But if I were to summarize, you do continue to have conviction in several tech, AI and robotics names, but also conviction in cyclicals, for example, in the U.S. across banks, materials, energy and the consumer segment.

Drew Tyler: Yes, that's correct.

Eloise Goulder: So before we close, could I ask you both, what are the key catalysts and/or risks that you'll be monitoring to support or refute your views?

Drew Tyler: So on the U.S. side, I would highlight the Federal Reserve meeting on December 10th. We have a number of earnings across both consumer sectors as well as tech later this month. And lastly, it's going to be the macro data specifically looking at non-farm payrolls and inflation data. When I think about the risks, so on the first hand is going to be the risk from earnings and the potential for the AI trade to bring sellers back to the table. And on the second, it's going to be macro data that shows a significant acceleration of the U.S. economy. And really the risk there is that bond yields reprice higher, creating a headwind for stocks to continue to rally.

Federico Manicardi: In Europe, we think the ECB should be relatively muted given improving growth versus lower inflation. But at the same time, we think the BOE easing could become more important next year. We also think it's important to track German fiscal spending, how the macro unfolds, particularly if the PMI extend their uptrend from here. And we also do think that French politics and Russia-Ukraine ceasefire prospects could be important for the region. In Asia, we're tracking corporate governance reform as well as fiscal and monetary mix in Japan. When I think of the risks, I would probably flag three. U.S.-China relation, AI narrative exhaustion, which is particularly a risk for Asia Tech, and also the risks from a sharp rise in interest rates.

Eloise Goulder: Thank you so much, Drew and Fedde. Well, there's clearly such a lot to be watching. And even between now and year end, we've still got the Fed on December the 10th and then NFPs and CPI after that. But it is interesting to note that globally two of the key risks really are the Fed and the extent to which the Fed is dovish, and also the AI trade and the extent to which earnings growth associated with AI, whether that's the AI producers or AI consumers really comes through. And arguably, those are two risks that exist globally that we believe the retail investor, based on our social sentiment work, is quite sensitive to. And it was really a deterioration in both of those two factors that led to retail sentiment decline into early November So it will be absolutely critical to continue to track those. So thank you very much, Drew, Fede, for taking the time to go through this today.

Drew Tyler: Well, it's been wonderful being here. Thank you.

Federico Manicardi: Thank you, Eloise.

Eloise Goulder: Thank you also to our listeners for tuning into this biweekly podcast series from our group. If you have feedback or if you'd like to get in touch, then please do go to our website at jpmorgan.com/market/data/intelligence, where you can send us a message via the contact us form. And with that, we'll close. Thank you.

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