The good times keep rolling.

Stocks notched more new highs this week, with the tech-heavy NASDAQ Composite the latest to join the club of record-breakers. That comes even as investors dial down their enthusiasm for the Fed’s pivot party to rate cuts.

But while the bulls are euphoric, the bears are waiting for the next shoe to drop.

Below, we dig into the debates that have defined the week, and where we stand – on inflation, the strength of the rally and Washington happenings.

1) Where’s inflation really headed?

Bears say: Inflation progress has stalled, with news this week that the Fed’s preferred core PCE gauge increased in January by its most in a year (at a pace of +0.4% month-over-month). Goods disinflation, which was one of the first areas to show improvement, displayed some signs of petering out. Services prices are still sticky: shelter has been slow to cool, and Fed Chairman Jerome Powell’s “supercore” services ex-shelter metric increased the most on the month since December 2021. If that trend continues, Fed rate cuts feel further off.

Bulls say: This week’s figures were just as expected. One month doesn’t disrupt a trend, and price pressures seem on their way back to 2% targets more quickly than many thought over the last year. For instance, one of the most powerful disinflationary forces – shelter – has yet to unfold.

We say: There are going to be bumps along the way, but we think central bankers have the ammunition needed to win the fight against inflation. For one, the labor market continues to rebalance alongside still-solid growth. More foreign born workers and women are re-entering the labor force, alongside the allure of work-from-home postings (did you know that, according to LinkedIn, almost half of new jobs added last year were remote or hybrid?). That’s helped wage growth cool with minimal economic pain to date. Without rate cuts, though, further disinflation means real rates would continue to push higher and run the risk of overtightening. So on balance, while rate cuts may be less urgent than previously thought, they’re still on the way.

That creates a more nuanced approach to bond markets. If you are focused on rightsizing your strategic portfolio allocations, we still believe now is the opportunity to lock in yields and capture defensive characteristics by extending duration. That said, tight credit spreads and potential for more interest rate volatility should prompt more tactically-focused investors to find better value on the shorter end of the duration spectrum (i.e., in the 2–3 year range).

2) Can the stock rally keep going?

Bears say: The stock market is in a bubble. The so-called “Magnificent 7” have driven the lion’s share of the rally, pushing the S&P 500 to its most concentrated since the 1970s. All that enthusiasm seems wrapped up in AI hype that hasn’t proven its worth yet: investors seem excited about changes that could take years, or even decades, to unfold. With stock valuations this high, it feels scarily familiar to the dot-com bubble of the early 2000s.

Bulls say: It doesn’t look like much is standing in the way of more gains. The economy is solid. Inflation is easing. Fed cuts seem to be coming. Corporate earnings have been strong, and companies most closely linked to AI boast robust profitability. And not to mention, history is on our side: February officially marked a four-month-long rally. Since 1950, we’ve seen 13 other instances where the S&P 500 notched consecutive gains in November, December, January and February. Every time, the market was higher a year later, with an average gain of almost 17%.

We say: We agree that the path forward for markets is higher. We think big tech can continue to climb and other segments of the market can also join in. For one, we think the AI hype is real: Big tech companies, who are some of the most avid enablers and beneficiaries of AI, are already seeing real revenue contribution from their investments. Consider this about chipmaker Nividia: Despite climbing a staggering 460% since the start of 2023, its forward P/E valuation is still the same now as it was then (33x) – and it’s a far cry from the high of 63x last year. Stellar earnings growth has been the power behind its ascent. Other companies across industries are also deploying their own generative AI efforts, and we expect that to create real cost and efficiency savings sooner rather than later. The risk, of course, is that all those efforts don’t live up to their expectations – the bar is high.

At the same time, other sectors and pockets of the market, such and consumer-linked names, health care and small and mid-cap companies, stand to join in the rally. Last year, the Magnificent 7 contributed 60% of the S&P 500’s 26% total return, while remaining 493 companies accounted for just 40%. So far this year, that’s flipped, with “everything else” now driving almost 60% of the S&P’s return. We’re seeing it displayed in earnings, too, with another better-than-expected Q4 earnings season: Every sector in the S&P 500 has exceeded analyst projections. As corporates gain more confidence in what we see as a soft landing for the economy, we expect profit growth to accelerate. Layoffs are a dynamic to watch, but so far, we take this as a sign that management teams are working to operate more efficiently. Indeed, profit margins have now stabilized at pre-COVID levels.

That’s not to say there won’t be volatility. The average year since 1980 has seen an intra-year max selloff of 15% in the S&P 500. Yet, staying the course has historically proven beneficial: Of those years, stocks have still finished the calendar year higher 75% of the time.

3) Is Washington dysfunction manageable?

Bears say: Washington is a mess. Policymakers can’t seem to agree until the timer is almost out on important issues. Squabbling continues over budget plans – this year’s spending still isn’t officially decided, even if a government shutdown has been avoided for now (the latest stopgap measures only kick the can down the road to later this month). That makes Washington’s management of even bigger issues like the ever-growing stockpile of government debt all the more worrisome. Some are concerned a doomsday fiscal crisis is on the horizon, especially with interest costs higher. On top of that, it’s an election year, and the two sides couldn’t seem further apart.

Bulls say: Markets don’t care about politics. Whether it's worries about government shutdowns, debt ceiling drama or election candidates, the impact on markets has time and again proven short-lived. Policymakers always seem to figure it out, especially when the stakes are high, and the economy has been the bigger driving force for investors over the long term.

We say: We agree that the economy is in the driver’s seat, but there are risks. Budget disagreement is frustrating, and we’re not out of the woods yet. That could create near-term swings for markets, even if the impact is short-lived. Concerns around government debt are also warranted, but we think the risk is a longer-term one. The costs of a higher debt burden will need to be reckoned with at some point. Based on CBO projections, mandatory government spending will outstrip government revenues by the mid-2030s. At that point, it becomes more difficult for the economy to grow its way out of the problem. One of the potential solutions is to raise revenues through taxes, which means investors may want to consider making tax-efficient investing a priority in the coming decade.

Finally, while there is growing chatter around the 2024 election, it’s worth noting that another Trump versus Biden standoff offers more clarity at this point in the election cycle than we usually see. That could mean less scenarios for markets to discount. More distinct moves may come on the sector and industry level, but we think that either candidate’s potential administrations will have solid earnings momentum on their side to support markets.

We’re constructive on the year ahead

Debate is healthy, and there is no denying there are risks. In any given year, there are good things and bad things that can impact the economy and markets. Volatility around each of these catalysts as we move through 2024 is likely. Valuations may be high, but we tend to see the glass half full when we examine the current backdrop. Better growth instills more confidence across asset classes.

We are here to help you make informed investment decisions that keep you on track to achieve your goals. Contact your J.P. Morgan team to learn more.

All market and economic data as of 03/01/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

Index definitions:

The STOXX Europe 600 Index (SXXP Index) is an index tracking 600 publicly traded companies based in one of 18 EU countries. The index includes small-cap, medium-cap, and large-cap companies. The countries represented in the index are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Iceland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

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 Nikkei 225, or the Nikkei Stock Average, more commonly called the Nikkei or the Nikkei index, is a stock market index for the Tokyo Stock Exchange.

The Standard and Poor's Midcap 400, or simply the S&P Midcap 400, is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

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 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 is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.

The Standard and Poor's 500, or simply the S&P 500, is a capitalization-weighted stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.

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.

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

The S&P 500® 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.

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.
• Investment in alternative 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.
• 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, 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.
• 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.
• When investing in mutual funds or exchange-traded and index funds, please consider the investment objectives, risks, charges, and expenses associated with the funds before investing. You may obtain a fund’s prospectus by contacting your investment professional. The prospectus contains information, which should be carefully read before investing.
• 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.
• Real estate investments trusts may be subject to a high degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower.
• 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.
• Structured products involve derivatives and risks that may not be suitable for all investors. The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with the each individual structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss. The risks listed above are not complete. For a more comprehensive list of the risks involved with this particular product, please speak to your J.P. Morgan team.
• 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.