Since October 2022, JPMorgan's strategic analysts have maintained a pessimistic view on the stock market. However, a report by Chief Global Equity Strategist Dubravko Lakos-Bujas indicates a potential shift in sentiment. Although the firm hasn't updated its year-end S&P 500 target of 4200 points, suggesting a significant decline of 27% from current levels, Lakos-Bujas advises investors to reduce their market pessimism.
Lakos-Bujas highlights a change in strategy, moving away from favoring defensive stocks and shorting cyclical ones. This shift is driven by anticipated Fed rate cuts and new stimulus measures in China. He notes that policy support from the world's largest economies coincides with unexpected resilience in U.S. growth, tight labor markets, persistent government deficit spending, and record-high stock, credit, and housing prices.
JPMorgan points out the robust state of U.S. consumers, whose total wealth increased by $50 trillion since the pandemic. Federal Reserve data shows that U.S. consumers hold approximately $185 trillion in assets, with only $21 trillion in debt, indicating a healthy balance sheet.
Lakos-Bujas is also encouraged by solid corporate earnings growth, which is expected to accelerate from 3% to 12% over the next two years. He explains that U.S. companies are increasingly investing pre-tax income in capital expenditures, rather than returning post-tax profits to shareholders through buybacks, thus stimulating the economy.
The boom in artificial intelligence technology is partly responsible, as major tech firms plan to accelerate R&D and capital expenditure investments, exceeding $500 billion annually. Lakos-Bujas believes these factors, combined with the notion of American exceptionalism, are helping counteract uneven macroeconomic weaknesses.
He cautions, however, that it is premature to declare a turning point, although the likelihood of a short-term recession appears low, especially with strong job growth and declining unemployment counteracting labor market slowdown trends.
Nevertheless, Lakos-Bujas warns that the upcoming November presidential election could introduce market volatility, depending on the outcome, and lower interest rates may pressure corporate profits, particularly in the financial sector.
