JPMorgan Cazenove said on Monday that the risk/reward for equities is “not all bad” as we head into year-end.
In an equity strategy note, the bank said: “While the activity prints are likely to remain challenging – its M1 lead indicator points to further PMI weakness, and the earnings are finally having a reset, with negative weekly EPS revisions, we believe that risk/reward for equities is not all bad as we move into year-end.
“In fact, we argued that we have entered the phase where the weak dataflow can be seen as good, leading to a policy pivot, and the activity slowdown might prove to be less deep than feared.”
JPM highlighted 10 factors that could help risk/reward for stocks in the second half.
It said valuations look attractive, both in absolute terms and relative to fixed income; positioning is reduced, with cash levels among clients generally elevated; and investment sentiment is overly bearish.
“Our call that Fed has likely peaked in hawkishness should gain traction, as they move above neutral range,” it said. “Post the still-likely outsized September hike, Fed is expected to turn much more sensitive to incoming dataflow. This is supported by inflation forwards which have stabilised.”
In addition, the bank said the US dollar could be peaking, and the strength of the dollar index in the first half was a big detriment for risk taking.
JPM said many activity indicators are in contraction territory, but the downturn might not need to feed on itself. Banks’ balance sheets are in a strong position. It also noted that “very importantly” for the consumer wealth effect, while housing activity has weakened sharply, and house prices have levelled off, after strong gains, they are likely to stay resilient.
Earnings revisions are negative, and are likely to see a reset, but they will in our view experience only a modest pullback, JPM said.
It also argued that the consumer is likely to be cushioned by excess savings accumulated during the Covid period, as savings rates dip materially below long-term averages.
Finally, “the global downcycle is unlikely to be synchronised, as China activity is turning for the better, seen in higher M1 and credit impulse,” JPM said. “The comps for China in 2H are very easy. This is important as many European and global corporates derive a significant share of sales from China.”
