J.P. Morgan sees a “challenging” stock backdrop in the first half 2024. Given that investors are seeking clarification on the path of monetary policy, J.P. Morgan anticipates that economic uncertainty will cloud the outlook for risky assets over the first half of the following year.
Due to the slowdown in activity, it is anticipated that equity markets will need to negotiate earnings adjustments. “We believe that the risk-reward for equities will start fundamentally improving once the U.S. Federal Reserve is advanced with interest rate cuts,” analysts at J.P. Morgan, led by Mislav Matejka, stated in a note when they were asked about their expectations for the future of the equity market.
Fed funds futures are now pricing in a reduction of more than one hundred basis points (bps) in 2024, with a forty percent likelihood that the reductions will begin as early as March.
The FEDWATCH
While J.P. Morgan warned that declining pricing and volume expectations would challenge expectations of a re-acceleration in corporate topline and margins, the company forecast that earnings growth in Europe would remain constant in 2024 under the presumption that a recession would not materialize.
Even though they have a ” high” position in European equities, they are not overly pricey, particularly when contrasted to the stretched values of stocks they own in the United States.
In comparison, the S&P 500 index (.SPX) has increased by 18.5% this year, while the pan-European STOXX 600 index (.STOXX) has up by 7.6% so far this year.
According to Matejka, easing monetary policy might result in a turnaround of their underweight position on European stocks in the second half of 2024. The European food retail, hotels and travel, and semiconductors sectors were all downgraded to “underweight” by J.P. Morgan at the sector level.
In 2024, there may be a rise in price rivalry in the food retail industry, which may result in a reduction in profits. Additionally, worries around pricing, volumes, and inventories may impact chip stocks, as J.P. Morgan said.
Maintaining an “overweight” position in Japanese stocks (.N225) is something that the bank continues to do. They believe there is a “more realistic chance” for emerging market equities (MSCIEF) to potentially outperform traditional market stocks, particularly if China’s economic growth surprises the market.
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