Trading Insights: A post-election rally in U.S. equities

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Eloise Goulder: Hi I'm Eloise Goulder, head of the Data Assets & Alpha Group here at J.P. Morgan. And today I'm really pleased to be joined by my colleagues, Andrew Tyler, head of Global Market Intelligence and Federico Manicardi, head of International Market Intelligence to talk about global equity markets post a phenomenal rally this year. So Drew, Fede, thank you so much for joining us here today.

Andrew Tyler: It's great to be here.

Federico Manicardi: Yes, great to be chatting today.

Eloise Goulder: So Drew, can we start with you? U.S. markets, they briefly touched 6,000 intraday in the week after the U.S. election and this strength has very much been a call you've been making all year. So Drew, why do you think U.S. equities have been so strong? And do you think they can go yet higher from here?

Andrew Tyler: So first I'd say the biggest drivers just basically been the healthy macro fundamentals in the U.S., which have been translated into above trend earnings growth, which we've witnessed over the past few quarters. So just put in some stats behind this for a second. So the U.S. consumers are holding about four trillion dollars in cash above and beyond what they did pre-pandemic. And that number continues to grow. And that number is growing at a time when the unemployment rate remains stable and inflation is now reverted back to about two and a half percent down from a level as high as nine percent. So when you kind of think about this strong U.S. consumer growth, that's really what's been driving above trend GDP, which is something that we witnessed dating back to 2023 Q1. So then coming into this year, so a recession by let's call it first half of next year, that was really the consensus view across the street. And so today we look at that possibility as having decreased to about 25% chance of occurring. The strong GDP growth drove above expected results this earnings season. So in this Q3 earnings season, we saw a 5.5 % year-over-year growth in revenue and 5.3 % year-over-year growth in earnings for the S&P 500 companies. And the Fed has now begun its easing cycle and we passed election uncertainty. Combine that with a strong macro environment with interest rates now normalizing, you have a favorable setup for U.S. equities. So in terms of how high we can go from here, one of the things that we discussed at the credit conference this past summer was the potential for the stocks to get to about 6,500 sometime in the middle of next year. And right now I think we're still on that trajectory.

Eloise Goulder: Thank you Drew. So you're very much sticking with your prior thesis. So the U.S. election, it was just two weeks ago and we have seen very sharp moves cross asset really since then. We've seen dollar strengthen, bond deals widen and of course under the surface there have been significant swings in equity themes. So Drew, what do you think the outcome of the U.S. election means for sectoral performance from here?

Andrew Tyler: So really where you've seen a lot of the outperformance are going to be in your small and mid cap names more broadly, but more specifically looking at sectors, financials, industrials, energy and technology. And while this can certainly be partly driven by a positive outlook for equities under this red wave scenario. It's important to remember that these moves are also supported by the very strong macro fundamentals, which we just discussed. So above trend GDP growth, strong earnings and a Fed that remains supportive of the market. So while these trends have emerged pretty strongly over the last, call it week and a half, we do think that these trends can prove durable as we move into December and again, turn the page into 2025. The outcome of the U.S. election cleared a number of political uncertainties for both C-suite managers as well as investors. And we saw anecdotal evidence from the ISM reports as well as earnings releases both in the U.S. and outside the U.S. that a number of managers were delaying capex and hiring decisions until they actually got certainty from the election. So for us, that just means that you're going to see further growth in terms of the economy, which we then believe will pull earnings a little bit higher so that three-pronged bull case continues to be supported.

Eloise Goulder: So in terms of the sectors you expect to outperform from here, where would you focus?

Andrew Tyler: I'd really look at financials and tech continuing to move higher from here. On the financial side, it's really the combination of a steepening yield curve and improving business cycle and the potential for deregulation. Whereas on the tech side, it's really still the story about AI and the earnings delivery you're seeing from here as capex across all industries continues to increase, but that capex is being pointed at tech. So I think that those would be the two sectors I like the most. In terms of an underperformer, a little bit more difficult to say. But I'd probably go with defensives, which tend to underperform when you have a very strong business cycle that tends to be expanding rather than a business cycle that is either stagnant or contracting.

Eloise Goulder: And last question for you Drew before we head to international markets. As we look ahead post the U.S. elections, what data will you be watching to inform your views and what would you say are the key risks to your bullish call?

Andrew Tyler: In terms of the data, a lot of eyes are still focused on the December Fed meeting. And between now and then, you still have one more CPI released, another non-farm payrolls, both of which are going to be important for the Fed to assess whether they're going to cut 25 basis points in December, which is the call from chief economist Mike Faroli. And how much further we have to ease within this cycle is very important for that. In addition to those key data points, I would also flag retail sales and to get a sense of like the health of U.S. consumers and obviously going into a holiday season, we can see very strong numbers. But from a key risk perspective, I would just say, number one, the higher for longer narrative. So what that basically means is that you can see the 10 year yield kind of moving back towards five percent and staying at those levels longer than anticipated, especially in the face of a Fed that's cutting rates. Number two, any evidence of GDP growth concerns. So for example, if you saw non-farm payrolls print negative or maybe retail sales kind of like two or three consecutive negative prints there. Number three would be potential for negative earnings growth, specifically with the mega cap tech names. And I'd also say beware of any kind of negative talk around the semiconductor industry, since that's been the key part of the AI trade, which has been very supportive of markets all year long. So those are going to be the three key risks that I would flag.

Eloise Goulder: Thank you so much, Drew. So Federico, can we turn to you? European equities have absolutely not taken part in the U.S. equity rally that we've really seen this year. In fact, the stock 600 is only up 5% or so year to date. So, Fede, why do you think European equities have been so weak?

Federico Manicardi: You're right, Eloise. The underperformance of European equities actually began early in the summer due to a combination of factors. Initially, it was political uncertainty, particularly regarding the snap election in France, which acted as a catalyst and subsequently, European equities continue to lag due to a slowdown in macro momentum, China macro environment remaining tepid, and earnings delivery being soft with profit warnings actually on the rise for two consecutive quarters. Most recently, decline occurred after the U.S .election as the risk of poses another challenge. Economist J.P. Morgan estimates that 2018 tariffs resulted in a cumulative 1% reduction in euro area GDP over two years, and they think that this time the impact will end up being similar. That said, they think that if tariffs of 10 to 20 percent of new exports to the U.S .were implemented, the GDP hit could be as high as 2 percent, with Germany and Italy being particularly vulnerable due to reliance on trade and manufacturing.

Eloise Goulder: So there really have been a number of negative factors for European equities, including stagnant macro growth, but also stagnant earnings delivery. So, Fede, as you look ahead, what's your view on European equities from here?

Federico Manicardi: Look, it appears we are heading into a challenging macro environment as Europe continues to face some structural challenges, including high energy prices, competition from China and fiscal consolidation in France and Italy. Additionally, as we mentioned, there is no clarity on U.S. trade and tariff and tax politics. That said, we have actually started to become a bit more optimistic on stocks 50, and we see actually the possibility of some support by year end. Indeed, many of the risks that we have mentioned are actually well flagged and with manufacturing PMI already at 2018 lows and 5e underperforming the PMI, much of the negative sentiment might be already as well priced in. Notably, on a rolling 6 months basis, the S&P 500 outperformed SX5e by 21%, which is more extreme than in 2012 and was only meaningfully higher in the late 80s. From a longer term perspective, the S&P to 5e price earnings premium has just reached a new all-time high and what I think is interesting is that we don't see this dislocation emerging in credit markets. Seasonality during the fourth quarter of the year typically also favors European equities and we shouldn’t forget that in 2016 the 5-year rallied 9% in December after remaining in a limbo for the month of November. Furthermore, investors have been de-risking from Europe's in the summer and positioning from hedge funds in INEX U.K. now appear low with the long short ratio at the 20th percentile. We also think there is some potential upside catalysts on the horizon. Before year end, we have the European Central Bank on December 12 and China Central Economic World Conference likely the second week of December. In Q1 with German election, which we think would be a positive given the possibility of reforming the debt break while the resolution of Russia Ukraine remains an upside risk though this one is harder to time.

Eloise Goulder: Thank you Federico. Well, that's fascinating. Clearly a lot of structural headwinds facing Europe. But on the other hand, as you say, a lot of that is priced in with the European markets only up a touch this year, unlike U.S. markets up over 20%. So finally, could we turn to China? Chinese equities have had a phenomenal rally since September with the CSI 300 up around 25% since then. What do you think has driven this recent strength? And do you think Chinese equities can rally further particularly in light of the potential for U.S. tariffs.

Federico Manicardi: China markets have been volatile in these quarters. The initial gains started in late September and extended to the first half of October as expectation of additional fiscal and monetary stimulus met with short positioning across hedge funds and EM-dedicated funds. However, we've seen about a third of these initial gains reversing as the fiscal stimulus has so far only been focused on local government debt swaps, but no measures regarding consumption, property de-stocking and SOE bank capital injections have actually been announced. Meanwhile, Trump's election win and the emergence of China hawks in top cabinet position heighten concerns of a ramp up in trade and geopolitical tensions. In this respect, J.P. Morgan economists acknowledge that the actual impact on GDP and earnings will be dependent on China tariff and effects response. But it estimates that if tariffs are lifted from 20 to 60 percent, the study hit to GDP could be as high as 1.9 percent of GDP, as headwinds will come from weaker export, but also the reverberations across business sentiment, consumption and employment. In terms of tactical risk reward backdrop, we don't have a strong directional view, but we do believe domestically exposed companies, particularly those that can benefit from more domestic policy easing, as well as high dividend yield stocks, can actually do well and they could benefit from any further fiscal and monetary easing into December.

Eloise Goulder: Thank you, Federico. So plenty of divergences across global equities so far this year. But to summarise your views, Drew, you're maintaining your bullish call on U.S. equities, your particularly bullish financials and also technology. But you're bullish the wider U.S. equity markets, given that strong macro backdrop and positive earnings. And then Federico, you do see some potential for European equities to find some tactical support at these levels. Yes, many challenges remain, including tariffs from the U.S .but arguably many of those risks are now well known and discounted in the price. So thanks to both of you there's certainly lots to watch from here.

Andrew Tyler: Well thank you very much for having us.

Federico Manicardi: Great to be here Eloise.

Eloise Goulder: Thank you also to our listeners for tuning into this bi-weekly podcast series from our group. If you have feedback or if you'd like to get in touch then please do go to our website at jpmorgan.com/market-data-intelligence where you can send us a message via the contact us form. And with that we'll close. Thank you.

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