Trading insights: A tactical US equity rally?

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Eloise Goulder: Hi, I'm Eloise Goulder, head of the Data Assets and Alpha Group here at J.P. Morgan, and today I'm so delighted to be sitting down with Andrew Tyler, who's global head of the Market Intelligence Team, and Federico Manicardi, who's head of the International Market Intelligence Team, to talk all things markets in what has been quite a turbulent start to the year. So, Drew, Fede, thanks so much for joining me here today.

Drew Tyler: Thank you for having me.

Fede Manicardi: It's great to be here.

Eloise Goulder: So, Drew, you've recently turned tactically bullish on U.S. equities, having been bearish since the 4th of March. So, what was your rationale for this change?

Drew Tyler: So, first, I would say that this is more of a technical call than a fundamental one. And so, what I'm looking at right now is the potential for the U.S. markets to continue to recover. So, they're already up about 10% from their lows earlier this month. And so, what we're looking for is three things. First is optimism surrounding the potential trade deals. And so, this could be anything from U.S. and India, U.S. and South Korea, or U.S. and Japan. And I think the second point is going to be due to the prowess of earnings that we're seeing from the tech sector. And so, the so-called Magnificent Seven stocks continue to report earnings this week. And we do expect a strong performance on the backside of those earnings. And then the third and final point comes down to positioning. And positioning has gotten very light, and it's enough to the point that we expect a tactical bounce within U.S. stocks.

Eloise Goulder: Absolutely. Well, on that positioning point, it's worth noting that our tactical positioning monitor triggered attractive again last week, having initially triggered attractive on the 8th of April. So, Drew, you've got this very tactically bullish view on U.S. equities as a result of these catalysts that are coming up. How would you play this in terms of sectors?

Drew Tyler: Yeah. So, I think the first sector is going to be technology. And then I also am looking at other sectors than the kind of cyclicals factor. So financials, consumer discretionary and energy. And so, all three kind of screen very positively as part of this theme, as well as have very light positioning.

Eloise Goulder: So, Drew, I know this is a very tactical view. What are your thoughts on U.S. equities over the longer term?

Drew Tyler: So, on the longer term, I'm a bit more bearish on this. And I think that there's a few reasons. First is, we don't really know the extent of the economic damage emanating from this trade war. But we do think that this is going to hurt consumers, for sure, but also corporations. And I would say that the U.S. looks like a relative loser in this given the magnitude of the tariffs that are going to be directed at the U.S. relative to the rest of the world. The second point on this is that we're going to probably see an increase in inflation. And so, what this is going to do is going to further hurt the U.S. consumer. But what it also means is that the Federal Reserve, the U.S. central bank is going to be unable to provide a monetary policy tailwind. The final point is that we're probably going to see the U.S. slip into a recession and growth there will be a bit more impaired than the rest of the world. And so, this is something that's been forecast by our chief U.S. economist, Mike Feroli.

Eloise Goulder: Thanks. Well, certainly more headwinds to be aware of over the medium term. So, final question for you, Drew, in terms of catalysts or data points, what will you be watching to inform your views and to determine when this tactical bounce is over, so to speak?

Drew Tyler: Yes, so I think this gets in the concept of what we refer to as soft economic data versus hard economic data. So, on the soft data, this is going to be more like sentiment and surveys, which we've already seen collapse inside the U.S. Now, the hard data, what we're going to watch for is on the labor market side, it's really the unemployment rate and non-farm payrolls. And then, I would say on the consumer side, what we're going to want to make sure of is that the consumer is still spending or for this bearish view to kind of come to fruition, the consumer to basically stop spending. So, things such as retail sales and its relation to wage growth. And then, the final thing would be consumer stress and corporate stress. So, this is really the concept of delinquencies, bankruptcies.

Eloise Goulder: Really interesting. So, there's a lot of the harder data points which could fall from here. And I understand we're going through earning season at the moment, and arguably Q1 results in terms of what's reported aren't going to reflect these headwinds. Drew, do you have any view on the timing of this and when the hard data might start to deteriorate?

Drew Tyler: So, I think that you're looking at probably late June to early July to see the hard data really roll over. And I do agree with you that this current earning season is showing that the U.S. was growing above trend in the first quarter of this year and that's being reflected in current quarter results. But I think as we move forward, it's going to be very difficult to repeat that. And that's what you're seeing as you're seeing the forward guidance being released or in some cases not released by the corporations. And I think all of this speaks to the medium-term view of being bearish.

Eloise Goulder: Thank you so much, Drew. So, Fede, I think it's a great time to hand over to you. Drew's obviously spoken about the potential for U.S. equities to bounce right now, but the more medium-term headwinds. So, Fede, how do European equities fit into this picture?

Fede Manicardi: We think we're in choppy waters or set differently in a trader's market. For those who follow our daily, we have neutralized our preferences in Europe around mid-March, and then we started to turn more constructive around April 9 as two things became more likely. First, positioning was turned into to a tailwind which you mentioned earlier. And second, there was evidence that the left tail of the distribution was narrowing as a pivot on trade policy was underway and some of the initial shock effect started to fade behind. In Europe, we like both cyclical and defensive. We have a preference for what we call our European recovery playbook, which is made up of banks, industrial defense, construction, and Germany. But we also like some defensive names, particularly insurance and real estate and one key thing to note here is that we particularly like the domestic axis. As we see relatively stable macro backdrop in the euro area, we see scope for ECB easing. We see relatively positive trends in the lending space, as well as also a positive story on the fiscal side. We also think the space is relatively more insulated from any further appreciation in the euro, which our strategy team projects to go around 1.2 around the end of the year from 1.13 right now.

Eloise Goulder: So what would you not be owning in Europe?

Fede Manicardi: Yeah, I think what we don't like is generally spend the exporters, U.S. exports, as well as the tariff loser space. But I think we should note that over the past few weeks, some of the market internals' sensitivity to trade headlines have started to shift in favor of this group, as well as our prime positioning suggests that there is some risk of a squeeze here. So we need to remain tactical.

Eloise Goulder: Thank you, Fede. Well, I think that medium-term theme on wanting to own the domestically exposed stocks within Europe versus the exporters is a really interesting one, given strength of the euro and given tariff risks for those exporting companies. Fede, looking outside European equities, do you have any views on the rest of the world and on other regions?

Fede Manicardi: Yeah, aside from the near-term fluctuations and our tactical preference for the U.S., we are quite constructive on international markets, and we think that space can remain well-supported. We just talk about Europe, but we also like Japan banks, China Tech, as well as LATAM, tactically. And we think one of the clear tailwinds behind this would be the story of the U.S. exceptionalism starting to fade. So generally, we hear three main points from clients. One is the cyclical perspective, right? We see two drivers of U.S. growth over the past few years that are starting to fade. It will be fiscal and immigration. Then we see a spike in uncertainty, which is obviously a headwind for businesses as well as consumers. And then there is also this theme of a stagflationary shock, which could limit how much the Fed can move. Meanwhile, when we look at the rest of the world, there is much more scope for monetary policy, both in Asia as well as in Europe. There is scope for fiscal. And obviously, we've talked a lot about the German fiscal coming through, as well as also possible fiscal coming through China around Q3. And I guess, in terms of the shock from tariff, it seems that this will weigh more on the U.S. than on the rest of the world. Another point is the starting point. So the U.S., at the start of the year, was around 70% of the global benchmark and is basically close to level that we last saw in 2000. Part of the reason behind this has been the wide valuation differential between the U.S. and the rest of the world and the tech exceptionalism. And we see that both of this team has now come under pressure from uncertainty and from the emergence of alternatives in the tech space.

Eloise Goulder: And in terms of catalysts that you're watching, we've heard from Drew on watching hard data and the extent to which that will deteriorate. Fede, what are you watching for Europe and international markets?

Fede Manicardi: Sure. I think three things. On the trade side, headlines have mostly been focused on potential deals and MOUs with India, South Korea, Japan, but also the UK. And we think if the details of this come out, it could also give more clarity around the situation between the U.S. and Europe, which for now hasn't been fully clear. A second set of catalysts that I'm watching is on the macro side. So for now, what has come up, at least in Europe, is that most of the major data releases have been weak, but they haven't fallen as much as we feared. And it probably supports the idea that the cycle outside of the U.S. could be stable. And obviously, the risk here, it will be some convergence to the downside. And I think on the policy side, we're watching both Germany and China. On Germany, the fiscal story is already behind, but now the focus is on the speed of approval, as well as also on the bureaucracy side, which has been a bit of a common point we heard from client. And on the China side, our economists think that the next wave of fiscal could come around the third quarter, so probably in July, and it will be obviously positive for international.

Eloise Goulder: Well, thank you so much, Drew, Fede. It's been a fascinating time to be discussing global equities, given the turbulence that we've seen this year. And I guess to summarize your views, Drew, you are calling for a very tactical bounce in U.S. equities, driven by the news flow that's likely to come out in the near term, which could actually be quite supportive, whether that's corporate earnings, which are obviously backward looking, or incremental tariff negotiations, and positioning had got quite light. We had seen significant shorts added by our hedge fund clients, and there's this potential for a short squeeze. But as we look to the more medium term, of course, there are headwinds. There are headwinds around tariffs. There's headwinds around their impact on the global economy. There's headwinds around inflation. And all of this could start to weigh on the hard data as early as June, you say, Drew. So certainly many dynamics to be watching, which could lead to international equities leading relative to U.S. equities over the medium term. So thank you so much, Drew, Fede, extremely helpful to hear your views today.

Drew Tyler: Wonderful being here.

Fede Manicardi: Thanks for having us.

Eloise Goulder: Thank you also to our listeners for tuning into this biweekly podcast series from our group. If you've got questions or if you'd like to get in touch, then please do go to our website at jpmorgan.com/market-data-intelligence, where you can always reach out via the contact us form. And with that, we'll close. Thank you.

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