Market update

The S&P 500 marked its 56th all-time high of the year this week.

The Magnificent 7 (+5.1%) fueled equity indices higher this week. The S&P 500 (+0.8%) and Nasdaq 100 (+2.4%) both made gains while smaller companies (Solactive 2000 -1.0%) took a step back.

In U.S. macro data, Institute for Supply Management (ISM) figures showed the economy continuing to expand, and labor market indicators (ADP and jobless claims) came in slightly weaker than expectations. Federal Reserve Chair Jerome Powell spoke at the Dealbook conference midweek and said the U.S. economy is in remarkably good shape right now. One of his favorite barometers, the Beige Book, pointed to economic activity rising, employment levels flat to up and prices rising only at a modest pace in most districts.

In fixed income, the curve steepened. The 2-year (4.14%) stayed flat, while the 10-year (4.17%) rose four basis points.

As we prepare to close out 2024, we take this opportunity to look ahead to 2025. Below, we highlight five themes we think have room to run in the year ahead.

5 themes for the year ahead

The labor market is likely to be firmer. The labor market has been in focus in the second half of 2024. The Sahm rule (three-month average unemployment rate rising 0.5% from its 12-month low) was triggered in July and has never failed to coincide with a recession. At that point, the conversation quickly shifted to a slowdown in the labor market and the need for the Fed to react quickly.

Since then, the unemployment rate has decreased by 10 basis points to 4.2%, as the labor force stayed about the same size. We think continued enforcement at the border will keep migration subdued, and as a result, limit labor force growth. The downward pressure on the labor force should at the margin tighten the labor market (more job opening relative to unemployed workers).

Even if the labor market tightens on the margin, our models suggest the Fed will still need to lower rates to support financial conditions. We still expect a 25-basis point interest rate cut at their meeting this month and more reductions into 2025. As such…

Cash yields are likely going to continue to fall. We said coming into 2024 that cash rates would move lower; that’s happened – and we believe that the trend will continue in 2025. The Federal Funds Rate, which sets the rate banks can lend money to each other overnight (and is the biggest input for cash rates), stands at 4.75%, down 75 basis points this year so far. The market is pricing another 85 basis points of cuts next year.

Many think of cash as a safe haven or even a source of income when interest rates are high. But as rates continue to move lower, we believe cash is likely to underperform other asset classes. Historically, in 10 of the last 12 cutting cycles, bonds have outperformed cash.

Cash is a necessary part of any lifestyle, but it’s not designed to beat inflation or produce long-term returns. What is? Equities. U.S. equities have historically returned 16% on average during soft-landing (our base case) cutting cycles.

Lower cash rates can present an opportunity for investors to consider moving out of excess cash and into assets that may have the potential for higher returns.

Equity earnings should broaden. Equity returns have been dominated by the “Magnificent 7” since the start of 2023. Over that period, the S&P 500 has returned investors 62%, more than half of which was contributed by the Magnificent 7 (returning 242% over the same period).

The strong returns have come for good reason – the Magnificent 7 grew their earnings at 40%, while the remaining 493 stocks in the S&P 500 posted 2%. We think performance should broaden in 2025 as the “493” are expected to more than 5 times their earnings growth to 13% in 2025.

Lower interest rates, a renormalization of inventories and production, and easier comparables should act as tailwinds for the cohort in 2025.

Merger and acquisition (M&A) activity set to pick up. With less than a month to go in the year, 2024 U.S. deal volume has already seen an uptick relative to last year (where activity was essentially frozen), and we think 2025 is even more promising. The incoming administration and the markets expectation for a less onerous regulatory environment is helping to drive the recovery.

President-elect Donald Trump has campaigned on deregulation; what does that mean? To start, Trump is likely to replace the leaders of multiple U.S. regulatory agencies like the Federal Trade Commission and the Justice Department’s antitrust division (where about 40% of the S&P 500 market cap is under investigation and transactions of any size must be approved). Just this week, Trump announced Paul Atkins, who’s known for advocating for free-market policies, as chair of the U.S. Securities and Exchange Commission (SEC).

The changes in these agencies, and in Washington across the board, are likely to usher in a period of deregulation, which could help to thaw frozen M&A, IPO and other financial market activity.

As a backlog of deals stands ready to be cleared, increased private lending should help jump-start transactions. The likely beneficiaries of a better environment for dealmakers? Wall Street banks, private equity and credit firms, and private business owners.

Artificial Intelligence (AI) infrastructure buildout should continue. 2024 is the year where many of us started to use AI tools in our day-to-day lives; we don’t see any sign of that reversing in 2025. On the contrary, as we mentioned in our 2025 Outlook: Building on Strength, we are likely to use these tools even more frequently across broader use cases, which requires power. For example, a standard Google search requires about 0.3 watt-hours of electricity, while a single ChatGPT query uses about 10 times as much.

For data centers alone, electricity demand is projected to nearly triple by 2030. The grid may need to add up to 18 gigawatts – about equivalent to three New York City’s worth of power demand.

That means the infrastructure which supports these AI tools will need an upgrade. The Department of Energy estimates that 47,300 gigawatt-miles of additional transmission infrastructure will be needed by 2035.

The need to power AI, a technology with the potential to be more revolutionary than the internet, is real. We’re seeing increased investment from the hyperscalers through capex and activity in private markets investing in energy providers. However, we still believe the buildout for AI, including the energy needed to power the technology, is a long-term theme.

Investors can take solace from the past year. Equities hit record highs, inflation has settled and a soft landing seems achievable. Looking ahead, equities continue to appear promising, deal-making is expected to pick up and long-term themes like AI remain relevant.

If you have any questions on how your portfolio should be positioned in 2025, your J.P. Morgan advisor is here to help.

All market and economic data as of 12/6/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

Private investments are subject to special risks. Individuals must meet specific suitability standards before investing. This information does not constitute an offer to sell or a solicitation of an offer to buy. As a reminder, hedge funds (or funds of hedge funds), private equity funds, real estate funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors

Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment, and reinvestment risk.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

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.

Private Equity is typically composed of Venture Capital, Leveraged Buyouts, Distressed Investments and Mezzanine Financing, which are all generally considered to be high risk, illiquid investments designed to deliver larger expected returns than publicly traded securities as compensation for their greater risk. As a result, investing in Private Equity is not suitable for all investors.

Index definitions:

The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight of the index total at each quarterly rebalance.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

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 index was developed with a base level of 10 for the 1941–43 base period.

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 MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

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 Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

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.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

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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RISK CONSIDERATIONS

• Past performance is not indicative of future results. You may not invest directly in an index.
• The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to 'stock market risk' meaning that stock prices in general may decline over short or extended periods of time.
• 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.
• In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.
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• Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the alternative minimum tax (amt).
• 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.
• Investments in emerging markets may not be suitable for all investors. Emerging markets involve 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 emerging markets can be more volatile.
• Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
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• Investment in alternative investment strategies is speculative, often involves a greater degree of risk than traditional investments including limited liquidity and limited transparency, among other factors and should only be considered by sophisticated investors with the financial capability to accept the loss of all or part of the assets devoted to such strategies.
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• As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.
• For informational purposes only -- J.P. Morgan Securities LLC does not endorse, advise on, transmit, sell or transact in any type of virtual currency. Please note: J.P. Morgan Securities LLC does not intermediate, mine, transmit, custody, store, sell, exchange, control, administer, or issue any type of virtual currency, which includes any type of digital unit used as a medium of exchange or a form of digitally stored value.
• The prices and rates of return are indicative, as they may vary over time based on market conditions.
• Additional risk considerations exist for all strategies.
• The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.