Market Update

U.S. equity markets are heading towards their first weekly gain in four weeks.

The Federal Reserve (Fed) left rates unchanged, decreased growth forecasts and increased near-term inflation expectations, but signaled that their base case for tariff inflation is that it will be – gasp – transitory. Futures markets are now pricing two interest rate cuts this year and about a 50% chance of a third. That sparked a bid in Treasury markets. The 2-year (3.95%) dropped 7 basis points (bps), and the 10-year (4.23%) is lower by 9bps.

In Europe, stocks continued their outperformance. This week, Germany approved legislation allowing defense spending in excess of 1% of GDP to be exempt from borrowing restrictions. That will unlock hundreds of billions in fiscal spend for the country, which could permeate throughout the Eurozone. The Stoxx 50 is up +0.2% this week and +11% this year.

In commodities, investors continued to flock to safe-haven gold (+1.6%). The precious metal is heading towards its 11th week of positive returns in the last 12, its best streak in over a decade.

With markets looking for clues as to which way the next leg of the trade will go, below we assess the bull and bear cases.

Assessing the bull and bear case

This week marks the five-year anniversary of the approximately 35% drawdown of the S&P 500 during the COVID-19 pandemic. As the world was going into lockdown, investors believed that the risks to the outlook were clearly skewed to the downside. Today, the S&P 500 is hovering near correction territory (-10% from highs), and risks to the bull and bear cases seem more evenly distributed.

The bears have been taking a victory lap to start the year. The S&P 500 is off to its third-worst start to a year in the last 15. Softer economic data (purchasing manager surveys, consumer sentiment and homebuilders’ sentiment) has emerged, and consumer inflation expectations have risen. The bears would argue that tariff escalation on April 2 will exacerbate both. The tax on goods will be stagflationary, further driving up inflation while continuing to weigh on growth. That could leave the Fed in a difficult situation to manage their dual mandate of stable prices and maximum employment.

The bulls would argue that it’s not about how you start the year, it's how you finish. They would concede that the economic data referred to above has been weak. But those figures represent “soft” data (perceptions, opinions and expectations for economic conditions), not the “hard” data (realized economic activity, like employment figures and retail sales). The bulls would point to the fact that the actual realized economic activity has held up quite well.

What’s more, the bulls would say that recent history suggests soft data has not been a good predictor of hard data, as Fed Chairman Jerome Powell mentioned this week. From 2021 to 2023, an index of soft data showed a decline and reversal of five orders of magnitude while hard data stayed about flat over the period.

On inflation, the bulls would argue that the University of Michigan consumer expectations of an inflation increase is one data point. Other measures of inflation expectations haven’t seen an increase of the same magnitude, and in some instances, have actually shown a decline. Most importantly for the Fed and markets is that long-run inflation expectations remain anchored near the Fed’s 2% target to mitigate chances of a wage spiral.

Every story has three sides: the bull case, the bear case and reality. We believe reality lies somewhere in the middle.

At the start of the year, market consensus was pricing in minimal risk. Over the last three months, risks have increased, and prices have adjusted to reflect them. In our opinion, that represents a healthy correction and acknowledgment of the distribution of outcomes.

We sympathize with the bears: Risks still exist to our outlook. The tariff overhang could cause a wait-and-see approach towards capital allocation and slower growth. Increased goods inflation could persist if supply chains are in fact reshored. To manage those risks, we think it’s prudent for investors to add resilience to portfolios through assets like gold (which can provide a hedge against uncertainty) and infrastructure assets (which can provide income and diversification from both stocks and bonds).

We think the bulls are right about inflation. Inflation expectations still remain anchored, and hard data has held up despite a shift in sentiment. In fact, poor sentiment may even present an opportunity. Going back to 1971, investing in the S&P 500 during the nine consumer sentiment troughs led to an average +24% return in the next 12 months. We think that investing in U.S. equities from here can still provide attractive returns into year-end.

We would not let the bulls nor the bears derail our investment plans. Remember everything that markets have experienced since the COVID-19 drawdown five years ago: inflation reaching the highest level since the 1980s, global central bank rate hikes, the Russian invasion of Ukraine, bank failures and two changes in the U.S. Presidential administration. The S&P 500 increased more than +150%.

Our advice when risks exist on either side of the outlook is to stick to a strategic asset allocation, use equities for long-term capital appreciation, fixed income to hedge during growth slowdowns and make tactical adjustments at the margins to take advantage of opportunities that arise.

For help finding your strategic asset allocation, reach out to your J.P. Morgan advisor.

All market and economic data as of 03/21/25 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.

Index definitions:

Gold: The U.S. Dollar Index (USDX) indicates the general int'l value of the USD. The USDX does this by averaging the exchange rates between the USD and  major world currencies. 

Hang Seng: The Hang Seng Index is a free-float capitalization-weighted index of a selection of companies from the Stock Exchange of Hong Kong.

The STOXX® Europe 600 is a broad measure of the European equity market. With a fixed number of 600 components, the index provides extensive and diversified coverage across 17 countries and 11 industries within Europe’s developed economies, representing nearly 90% of the underlying investable market.

The Solactive United States 2000 Index intends to track the performance of the largest 1001 to 3000 companies from the United States stock market. Constituents are selected based on company market capitalization and weighted by free float market capitalization.

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.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. Information presented on these webpages is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.

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