Trading insights: Can US exceptionalism keep its shine?

[Music]

Eloise Goulder: Hi, welcome to Market Matters on J.P. Morgan's Making Sense. I'm Eloise Goulder, head of the Data Assets and Alpha Group here at J.P. Morgan. And today I'm really pleased to be in New York together with my colleagues John Schlegel and Ellen Wang to discuss the outlook for U.S. and really global equities following a very interesting start to the year. As a reminder John is head of our Global Positioning Intelligence Team and Ellen is a member of our U.S. Market Intelligence Team. So John, Ellen, thank you so much for being here today.

John Schlegel: It's great to be chatting today.

Ellen Wang: Great to be here.

Eloise Goulder: So John, can we start with you? U.S. equities have staged a phenomenal rally over the last few years. The S&P 500 was up over 20% through each of 2023 and 2024. But this year, it hasn't been quite as rosy. S&P 500 is only up about 3%. And the rest of the world in many cases has been outperforming, most notably in Europe, where the SX5E is up 10% now year to date. So John, can you start by characterizing positioning in U.S. equities right now? And what's changed recently? And what might explain the relative underperformance in U.S. equities year to date?

John Schlegel: So from an aggregate positioning standpoint, we think the overall level is a little bit above average, but not extreme. So call it the 60 to 70th percentile. And this is consistent when we look across more systematic investors like CTAs, as well as more fundamental equity hedge funds. And so overall, this level positioning has not changed much year to date, because you've had certain catalysts that were more bullish and others that were more bearish. And I think of two in particular, one, the initial inauguration, which drove a bit of a bullish impulse and a rally in equities in the U.S., because there were less tariffs than people expected at the outset. But it was followed by the Deep Seek news and a little bit of a question mark around some of the AI winners in the U.S. And so those two things have kind of washed out. And overall, we haven't seen a big change. Underneath the surface, there has been some material shifts in the flows. And I think the retail investor buying, which has been some of the most extreme we've seen in the last number of years, has been a certain positive support for markets. And on the flip side, some of the hedge fund dynamic has been a bit more bearish, lightening up risk over the past few weeks. But they net together to something that's much more neutral.

Eloise Goulder: And sticking with the U.S., positioning, you say, is above average, somewhere in the 60 to 70th percentile range. What do you think this means for the performance for U.S. equities from here? I mean, is there further positioning headroom should fundamental news flow be positive?

John Schlegel: So that's a great question. And I think if we look at the macro and fundamental backdrop that I know Ellen will get to in a little bit, it does suggest that there's still a positive story intact in the U.S. And so our view would be you can still look to buy the dip. If we also look at some of the different flows, be it from the retail side, ETF flows, hedge fund flows, looking at them in aggregate generally points to a still positive trajectory by the end of the quarter. One of the ones that I think is interesting is the ETF flows to U.S. equities was extremely strong at the end of last year and has been weaker at the start of this year. But if you look at periods when it peaked and the market's performance a month afterwards, if that is still positive, then most of the time, i.e. 12 out of the last 14 times we've seen this happen, the S&P was still up over the next couple of months, albeit only up by about 3%. So I think it suggests there is still a bit more positivity there. I think in terms of whether or not things could run faster, you would likely need a shift in sentiment, arguably based on less tariffs and a bit more normalization of some of that news flow, along with the continued robust development on the U.S. economic front, in particular, I think inflation coming down to get people more comfortable with where rates are going from here, to really drive a bit more of a strong impulse into U.S. equities and positioning to rise a lot faster versus staying a bit more closer to neutral.

Eloise Goulder: And that's really at the aggregate S&P 500 level. What about under the surface? I mean, are there pockets that look particularly heavily positioned versus particularly lightly positioned?

John Schlegel: So there's certainly pockets. I would start, though, with financials, which we still think is a very positive sector, especially if we think the market is going to continue to rally, mainly because the ETF flows which tend to drive that sector are coming off of such a low base. They've been certainly positive in the last few months, but there's a lot more room for that to go. If I think about hedge fund positioning specifically, then the areas where we still see things quite light is in pockets of software, as well as insurance stocks, and then various defensives, be it telecom or certain staples, as well as large cap healthcare. In terms of what's more elevated, it tends to be some pockets of cyclicals. This includes things like airlines, transports, banks, and one other area outside of cyclicals, which is medtech, given some of the rally and increased positioning recently.

Eloise Goulder: And turning to Europe, I mentioned earlier that the SX5E is up a full 10% year to date. So has positioning really caught up with this strong performance in Europe? Or are there areas that still look quite light?

John Schlegel: There are certainly some areas that have caught up pretty quickly. And I would say the systematic CTA side has had a big shift more positively at the start of this year. I would also note that some of the ETF flows into European equities have been quite positive. And on the hedge fund side, we've seen those flows turn more positive in the last few weeks as well. So the way I would put it is, from a near-term standpoint, a number of the more flow or systematic measures do suggest that positioning has caught up quite a bit. But from a long-term standpoint, given hedge fund positioning into European equities ex-the U.K. stocks is still near multi-year lows, and in general, I think some of the outflows from European mutual funds and ETFs have been quite large over the past number of years, there could be that kind of longer tailwind to the region if things continue to get better. That's more of a long-term positioning story than a short-term one.

Eloise Goulder: And finally, from your perspective, any catalysts or risk factors you'll be watching to inform your views?

John Schlegel: So some of the typical ones that get mentioned I think will matter. So things like tariffs, inflation, as well as the AI narrative. But there is another pocket that I think is worth watching, and this would be the momentum factor, which has had a really good run recently, as well as when we look at our own hedge fund book, the long short spreads have had another record monthly run, and this has come with regrossing of portfolios, which has picked up again the last week or so. And so these dynamics, which have been quite positive, don't tend to go on forever. It's not clear what's going to change that, but it's definitely something we're trying to watch for, what could change that narrative.

Eloise Goulder: Thank you, John. That's really helpful. So if I were to sum up, longer term, you do see room for positioning to get higher in both U.S. and European equities. In the U.S., the key thing to watch will be the retail investor, where we have seen significant buying recently. So can that continue is really the question? And in Europe, we've seen significant buying from many of the more tactical market participants recently. So really, for that to continue in the near term, we're going to have to see some positive catalysts from here. So a good time to head over to Ellen to hear about the fundamental views. So Ellen, you have been fervent bulls on U.S. equities over the last few years.. From a macro and a fundamental point of view, what do you think has driven U.S. equity performance recently?

Ellen Wang: Thank you, Eloise, for having me. S&P 500 has been up 2.9% year-to-date, but underperforming many regions such as Europe, mostly because of the shifting narrative of tariffs and also the Deep Seek induced sell-off Despite this underperformance, the overall index has been still up nearly 3%, which has been driven by a few factors. First, U.S. macro data, particularly the dovish December CPI and the robust employment reports, point to a Goldilocks backdrop that continues to support economic growth reinsert: and earnings delivery. Second, earnings remain robust. With about two-thirds of S&P 500 companies reported so far, the blended earnings growth rate is at 16%, higher than the 12% expected growth rate, which is also the strongest earnings growth since Q4 2021. We continue to expect U.S. exceptionalism to play out in 2025 and see the combination of strong U.S. GDP, positive EPS growth and the pause Fed continue to support the long-term bull case for U.S. equities. 

Eloise Goulder: So Ellen, what I'm taking away is that following a bit of a reversion in the U.S. exceptionalism story this year, you do expect it to come back to the fore with U.S. equities rallying and outperforming in the coming months. And it is worth noting that we heard from your Europe and international-based colleagues, Federico Manicardi and Victoria Campos, a couple of weeks ago on this podcast series and their view on European equities. They had been bullish through the end of last year and earlier this year, but they turned that to more of a balanced view, really on account of the fact that technicals now are looking more stretched in Europe. Yes, of course, there are positives. There's the incrementally improving macro data from a low base. There's the dovish ECB. There's possible upside catalysts if we get a ceasefire in Ukraine or if China stimulates further. But against that, we have the negatives that absolute economic growth is still very muted in Europe. And there are some structural challenges, including the comparatively higher energy prices in Europe.

Ellen Wang: Yes, I would agree with that.

Eloise Goulder: And within the U.S., which sectors or segments are you really most bullish on?

Ellen Wang: So we maintain our barbell approach, meaning that we like elements of tech and cyclicals. Within tech, we remain bullish on MAC-7, data centres, semis. And within cyclicals, we particularly like financials, regional banks and some parts of consumer discretionary, such as retailers, transport and some small caps.

Eloise Goulder: So before we close, you're clearly relying on this continued robust U.S. economic growth, plus some stability in bond yields to uphold your bullish view. In that context, what are the key catalysts you'll be watching to confirm or to refute your views?

Ellen Wang: Yeah, I will watch for two key catalysts. First, new laws or executive orders on tariff and immigration that could slow down U.S. GDP growth. Second, on earnings, I think what is the key is the MAC-7 earnings momentum. It feels unlikely that we see S&P 500 earnings growth weakening without a sharp decline in MAC-7 earnings. If we see that high level of MAC-7 earnings growth to start converging with the S&P 493 and the rest of the world, this broadening may drive an earnings slowdown.

Eloise Goulder: Thank you, Ellen. And it's worth noting we also have a number of catalysts across the rest of the world that are worth watching in the context of U.S. exceptionalism. In Europe, we have the question around the German elections, which will be on February the 23rd, and what that means for the political landscape there. We're also waiting to see if we get any ceasefire news between Russia and Ukraine and whether we get any China stimulus. And I guess our high level conclusion is in the absence of positive catalysts there, and given technicals are actually now pretty stretched for several indices in Europe. And absolute economic growth is still very muted. We would be sticking with our U.S. exceptionalism thesis. So brilliant. It's been really helpful to hear your views, John and Ellen. Thank you to both of you. There's certainly lots to watch from here.

Ellen Wang: Thank you for having me.

John Schlegel: Great to be with both of you.

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 by the contact us form. And with that, we'll close. Thank you.

Voiceover: Thanks for listening to Market Matters. If you’ve enjoyed this conversation, we hope you’ll review, rate, and subscribe to J.P. Morgan’s Making Sense to stay on top of the latest news and trends, available on Apple Podcasts, Spotify, and YouTube. The views expressed in this podcast may not necessarily reflect the views of J.P. Morgan Chase & Co and its affiliates (together “J.P. Morgan”), they are not the product of J.P. Morgan’s Research Department and do not constitute a recommendation, advice, or an offer or a solicitation to buy or sell any security or financial instrument.  This podcast is intended for institutional and professional investors only and is not intended for retail investor use, it is provided for information purposes only. Referenced products and services in this podcast may not be suitable for you and may not be available in all jurisdictions.  J.P. Morgan may make markets and trade as principal in securities and other asset classes and financial products that may have been discussed.  For additional disclaimers and regulatory disclosures, please visit: www.jpmorgan.com/disclosures/salesandtradingdisclaimer. For the avoidance of doubt, opinions expressed by any external speakers are the personal views of those speakers and do not represent the views of J.P. Morgan. © 2025 JPMorgan Chase & Company. All rights reserve.

[End of episode]