Our Top Market Takeaways for May 19, 2023

MARKET UPDATE: Breakdown, breakout, or rangebound?

Times are tricky. The market narrative flits from soft to hard to no landing in as quickly as a day’s time. Some look at the S&P 500’s 10% year-to-date rally and find comfort – others see a flashing warning sign.

Is the market headed for a breakdown, a breakout or will it just stay rangebound? Today, we explore the paths forward and offer our take.

Breakdown

Rate hikes have consequences, and with inflation stubborn and sticky at 4-5%, the risk is that the Fed has to do even more (markets are already betting on a 40% chance of another hike next month). Bank stress seems to rear its head every few weeks, and even if it doesn’t unwind into a full-blown crisis of confidence, the flow of credit to the economy is drying up. Banks are tightening lending standards, and some measures for loan demand are at their weakest since 2009. Ripples are already being felt in the office real estate sector.

With costs high and credit getting scarcer, companies may struggle to turn a profit and cut costs, including through layoffs. Job openings are now at their lowest in almost two years, and employees seem to be less confident in finding another job if they need to – it’s only a matter of time before the cracks expand into full-blown layoffs. With fewer jobs to go around, the consumer tends to become either less willing or less able to spend. That puts a stopper on economic activity – and that’s not even layering in the fallout risk from the still-unresolved debt ceiling debate.

That foreboding backdrop mobilizes bears that think the stock rally just can’t last. Even with Q1 earnings season shaping up better-than expected the last few weeks, the S&P 500 has traded pretty much flat through it all. What’s more, much of this year’s gains have been in thanks to big tech leading the charge: Apple, Microsoft, NVIDIA, Meta, Amazon and Alphabet have contributed about 8.3% out of the S&P 500’s 10.0% year-to-date rally.

All that leaves the market expensive for a gloomy outlook, and the tradeoff between stocks and bonds not all that compelling. The forward P/E multiple of the S&P 500 is nearing 18.5x again, and the spread between what you can yield from earnings and what you can get from bonds is the tightest of the last 10 years.

DISCLOSURES

All market and economic data as of May 18, 2023 and sourced from Bloomberg and FactSet unless otherwise stated.

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.

International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.

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.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The MSCI World Index is a broad global developed markets equity benchmark designed to support: Asset allocation: Consistent, broad representation of the performance of developed equity markets worldwide, without home bias.

The Bloomberg Aggregate Bond Index or "the Agg" is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

The NYSE FANG+ Index is an equal-dollar weighted index designed to represent a segment of the technology and consumer discretionary sectors consisting of highly-traded growth stocks of technology and tech-enabled companies such as Facebook, Apple, Amazon, Netflix, and Alphabet's Google.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

RISK CONSIDERATIONS

• Past performance is not indicative of future results. You may not invest directly in an index.
• Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk.  Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
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IMPORTANT INFORMATION

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.

Bonds are subject to interest rate risk, credit and default risk of the issuer. Bond prices generally fall when interest rates rise.​ Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.;