Equity Strategy: Reiterate that broadening in leadership is unlikely to have legs without yields, PMIs nor earnings moving up

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

We believe that the broadening in market leadership that was seen at some points this month is unlikely to have legs, as we don’t expect bond yields to move higher, especially not for the right reasons. Cracks in the labour market are emerging, manufacturing PMIs are not converging with services, as consensus was expecting; in fact the opposite appears to be happening, and any China stimulus might end up underwhelming – sell the news. We keep OW Growth vs Value style, and think that pure Defensives could catch a bid – Staples, Utilities and Healthcare, given our projection of falling bond yields in 2H, risk of weaker PMIs and challenging EPS revisions. EPS revisions for S&P500 have finally moved positive for some weeks, the first time since last summer, but any continued improvement will be at odds with a potentially weakening labour market. The claims indicator last week entered into bearish territory. Also, one typically needs composite PMIs above 53-54 in Eurozone for sustained EPS upgrades, but that might be lacking. Manufacturing PMIs are unlikely to bounce much if one considers M1 leading indicators, and the services PMIs are at risk of rolling over, too. This would be reinforced if the labour market is turning, as this could undermine the so far resilient final demand picture, and lead to more destocking. Regionally, we think the trade of OW UK or OW Switzerland vs UW Eurozone should be put on in 2H, we reiterate our downgrade of Eurozone to UW from last month.

 

This podcast was recorded on 26 June 2023.

This communication is provided for information purposes only. Institutional clients can view the related report at http://www.jpmm.com/research/content/GPS-4445719-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2023 JPMorgan Chase & Co. All rights reserved.