This week’s macro mania gave us confidence in our Mid-Year Outlook.

Disinflation is sending a cool wave through the summer heat. This was good news for the Federal Reserve, which signaled that when it does make its next move, it’ll be a cut. Artificial Intelligence (AI) momentum just keeps building. Stocks are hitting more new highs and bonds are rallying, but it’s not all straightforward – dispersion lies under the surface, and risks remain, from elections to geopolitics.

How do investors play it in their portfolios? Here are five actions worth considering today.

Continue to move out of cash

Wednesday brought a doubleheader with the latest U.S. Consumer Price Index (CPI) print and a Fed policy meeting. It was good vibes only.

Both headline and core CPI cooled to the slowest pace we’ve seen in years. The key downside driver was “sticky” services, as Chair Powell’s “super core” services ex-shelter gauge actually fell (i.e. deflated) in May for the first time since 2021. A few hours later, the Fed signaled that the economy can handle higher rates for a bit longer and that the next move is still lower – shifting its projections from three cuts this year to just one while awaiting further inflation progress.

Meanwhile, the race to rate cuts is already on elsewhere. Out of 37 central banks we track, 20 are now in easing mode. This means that for the first time in over two years, more central banks are cutting rather than hiking.

Times are changing. Cash has played a noble role in portfolios over the last two years and is a necessary part of any lifestyle. But even if policy rates settle in a higher range than the last cycle, the shift away from global tightening, albeit staggered, signals that today’s elevated cash yields won’t last forever. This week alone, 2-year Treasury yields have fallen over 20 basis points. Meanwhile, U.S. households hold over $20 trillion in cash across checking accounts, time deposits and money market funds, compared to roughly $15 trillion in 2019.

We believe better opportunities exist today, especially for long-term investors looking to grow and compound their wealth over time.

Embrace equity exposure

The S&P 500 just notched its 29th record high of the year. Looking back since 1950, whenever we’ve seen this many all-time highs in the first half of the year, the full year has averaged a 20% return.

Today’s backdrop looks poised to continue the upside trend. The economy is at its healthiest in decades, and inflation looks to eventually settle into a 2% to 3% range. That’s historically been one of the best eras for stocks. Inflation below 3% tends to support equity valuations and benefit earnings, with companies able to raise prices while also managing costs.

Past performance is no guarantee of future results. It is not possible to invest directly in an index.

We’re seeing this in action: Profit margins in developed economies are near their strongest levels in decades, signaling that companies are more efficient at turning sales into profits. To boot, mega-cap firms have demonstrated exceptional earnings power despite higher rates, and it doesn’t stop there: The latest Q1 earnings season saw eight out of 11 S&P 500 sectors post profit growth, with 80% of companies beating expectations (well above the 10-year average).

But within that strength, investors should note dispersion beneath the surface. Currently, only about one-quarter of stocks have outperformed the S&P 500’s 14% year-to-date return, near the lowest share in the past 10 years. This creates opportunities for active investment decisions. We see some of the strongest potential across sectors such as technology, industrials, consumer discretionary and healthcare, and are always on the hunt for mispricing’s. For instance, some of the highest quality small and mid-cap companies are trading at a meaningful discount to their large cap peers.

Lean into credit opportunities

After the rate reset, bonds are back to being bonds. Most pockets of fixed income, outside of Treasuries, are now outyielding cash for the first time in two years. As a strong (albeit slowing) economy keeps default rates low, we think investors can pick-up even greater yields by going out on the credit risk spectrum – building in both strong income potential as well as protection in the event of a downturn.

Past performance is no guarantee of future results. It is not possible to invest directly in an index.

Some opportunities may not last forever. For instance, the municipal bond market is more seasonal than that for corporate credit. Over the last few weeks, a record supply of new bond issues has pushed municipal yields well above average. But as supply tends to dry up over the course of summer, yields may not be this high for much longer.

The rest of the credit landscape also shows why it’s a good time to be a new lender. Direct lending, a segment of private credit, is offering yields around 11%. We think this more than compensates investors for potential default losses. Elsewhere, specialized credit investors can capitalize on the reality that not all borrowers are created equal, stepping in to help companies and their creditors renegotiate their agreements. Such “amend and extend” transactions increased tenfold between 2022 and 2023.

Position for the AI revolution – but be discerning

This week’s news flow has only added to the AI buzz – with the announcement of “Apple Intelligence,” alongside stellar earnings reports from the likes of software leaders Oracle and Adobe and chipmaker Broadcom. Combined, those four companies have added some $430 billion to the S&P 500’s market cap this week (through Thursday’s close).

In all, the market seems to be sussing out which AI players can demonstrate real productivity gains, revenue creation, or both. That approval does not come easy – even for tech giants. For example, Apple has lagged behind its “Magnificent 7” counterparts for most of the year, and it even took a few days for markets to welcome its latest efforts.

In time, we believe the potential use cases span almost every industry, and that’s not to mention the massive infrastructure needed to power it. One inquiry on ChatGPT requires up to 10x more power than a traditional web search. As we decipher the power and capabilities of AI, we believe it will be transformative, akin to the internet and the steam engine. But as in those times too, a discerning eye is key. Some of the future winners may not even exist yet.

Add armor to your portfolio

Risks of all kinds are apparent. For instance, this week brought word that France is joining the election party, and the injection of more political risk brought its fair share of jitters.

But while France’s CAC 40 Index was down more than 5% this week, the S&P 500 has made a new record high every day of the week so far. That signals how markets closest to key events and uncertainties can be particularly sensitive, but more often than not, they do not derail the broader global economic and market backdrop.

In turn, the overarching theme of our Mid-Year Outlook rests on the fact that global economic strength exists alongside genuine risks that warrant monitoring, especially around elections and continued geopolitical turmoil. This requires investors to be alert and to insulate portfolios from destabilizing events – whether that be through diversification, tax-efficient planning or investments oriented around the changing world order.

In all, we see a strong economy in a fragile world. To us, that looks like a healthy backdrop for investors as they prepare for the second half of 2024. Read our Mid-Year Outlook and discuss it with your J.P. Morgan advisor for more on these insights.

All market and economic data as of 06/14/2024 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.

Index definitions:

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

The CAC 40 is a benchmark French stock market index. The index represents a capitalization-weighted measure of the 40 most significant stocks among the 100 largest market caps on the Euronext Paris.

The Bloomberg EuroAgg Index is a benchmark that measures the investment grade, euro-denominated, fixed-rate bond market, including treasuries, government-related, corporate and securitized issues. Inclusion is based on currency denomination of a bond and not country of risk of the issuer.

The Bloomberg U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.

The Bloomberg Pan-European High Yield Index measures the market of non-investment grade, fixed-rate corporate bonds denominated in the following currencies: euro, pounds sterling, Danish krone, Norwegian krone, Swedish krona, and Swiss franc. Inclusion is based on the currency of issue, and not the domicile of the issuer.

The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

The ICE Variable Rate Preferred & Hybrid Securities Index (PVAR) is designed to track the performance of floating- and variable-rate investment-grade and below-investment-grade U.S. dollar preferred stock, as well as certain types of hybrid securities determined by the index provider, comparable to preferred stocks, that are issued by corporations in the U.S. market.

The Bloomberg 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.

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 S&P 500 Equal Weighted 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 – or 0.2% of the index total at each quarterly rebalance.

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.

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.

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.

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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• 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.