U.S. equity markets have experienced robust gains over the past 2 years, while volatility has been tempered. While our Long-Term Capital Markets assumptions still suggest long-term upside in U.S. equities, it would not be surprising to see volatility pick up after being muted for an extended period of time.¹ We also wouldn’t rule out the possibility of market pullbacks – looking back over the past 40 years, the S&P 500 average intra-year drawdown was -14%. Even with those pullbacks though, the index finished higher in 31 of those 40 years.

Looking ahead, uncertainty around potential tariffs and their impact on inflation and growth expectations, on top of unstable geopolitics, could create a bumpy ride for the markets. Moreover, after a decade of strong market returns, we expect more modest performance for equities looking ahead. Through the end of 2024, the S&P 500 Index returned 13.1% annualized on a 10-year basis, while our forward-looking forecast estimates for U.S. Large Cap Equities are closer to a 6.7% return over the next 10-15 years.²

Given this view, if you plan to build out your exposure to the equity markets, you may want to consider pursuing an approach that is designed to react to market volatility and generate potential tax savings through "tax-loss harvesting" strategies.

These strategies are designed to give you tax-smart equity exposure – and potentially lower your ultimate tax bill – by capturing (or “harvesting”) losses that you can use to help offset capital gains. Ongoing tax loss harvesting can help transform market volatility into tax benefits for you, by seeking to realize losses that you could use to offset your realized capital gains and potentially reduce taxes you owe. Instead of just riding out the bumps in markets, you can use the market’s natural volatility to your advantage, by crystallizing losses along the way.

Tax-loss harvesting is designed to help investors in various types of market environments, and is most efficient in volatile markets.

Although strong markets may not present as many options for loss harvesting as bear markets, they can still produce meaningful opportunities for capturing tax losses. Ultimately, directionality is less important a driver than the natural, ongoing volatility of equity markets – and the dispersion of returns that they produce.

Between 2017–2024, for example, the S&P 500 returned an average of 14.8%, but the market also experienced a fair amount of dispersion among individual stock returns. In each of those years, around 160 stocks on average posted negative annual returns, creating opportunities for tax-loss harvesting.³ The idea of volatility may give pause to investors – but this natural dispersion between top and bottom performers can also create opportunities for a loss harvesting strategy to deliver potential tax benefits for clients.

Capturing tax benefits in your equity portfolio

How, exactly, does tax-loss harvesting work?

At its simplest, tax-loss harvesting can potentially help you reduce your tax burden. It allows you to recognize losses that can then be used to offset capital gains in other parts of your portfolio. The key is that the loss must be realized, meaning you would have to sell the stock for less than its purchase price; the stock cannot remain in the portfolio. Painful as it may be in the moment, realizing losses can potentially have a meaningful, positive impact on helping you achieve your overall wealth goals.

You can still maintain your asset allocation by buying a similar stock to take advantage of any potential long-term upside. In this way, you can capture losses and use the tax relief to your benefit while keeping your portfolio aligned to your overall investment objectives. Be careful, however, not to breach the “wash sale” rule when choosing the replacement stock.

For those investors who are willing to get – and stay – invested, the potential to realize this kind of tax alpha, which is the incremental value-add resulting from tax-efficient management, may actually increase in years when markets turn volatile. In fact, a larger differential between rising and falling stocks tends to yield bigger potential tax savings. Even so, it’s important that when considering these strategies, you should plan in advance and consult with a tax professional to ensure alignment with your unique needs and goals.

Innovative technology enables robust tax-smart investing

Thanks to the power of technology, the harvesting of losses (and their replacement with comparable stocks) can now be done on a systematic, ongoing basis.⁴ Whereas in prior years investors may have only looked at opportunities to harvest losses at year-end, robust technology now enables us to monitor accounts daily, capturing losses throughout the year which enhances the effectiveness of tax-loss harvesting.

We can help

If you would like to know more about rebuilding your equity exposure in a tax-efficient manner, consider talking to your J.P. Morgan team. We are here to help.