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Uddrag fra head of JPMorgan’s Market Intel desk
The S&P finally broke through, and held, 6k setting a new all-time high on Friday which also broke two consecutive weekly contractions. We think the market setup is bullish and expect a wave of new all-time highs as we gain clarity on the budget/tax bill and trade policy entering earnings season where expectations are too low.
On earnings, we think that Financials will create positive momentum carried and accelerated by MegaCap Tech into the Aug 28 NVDA print.
Positioning has yet to create a headwind and think the NFP print will be enough to carry markets higher until positioning gets stretched. Some more color on the bull vs. bear debate is below.
BULL v BEAR
BULL CASE
- (i) Bullish Macro Data – the labor market is the most important macro variable and NFP above 100k should be enough to keep the SPX on track to make new ATHs;
- (ii) Inflation Fails to Spike – dovetailing with labor markets is the inflation picture and the July 15 CPI print looms large and a failure to see a material increase may mean that any future spikes are discounted given the likelihood of a new series of trade deals which may lower effective tariff rates;
- (iii) A Wave of Trade Deals – the expectation is for a series of trade deals that may look like the US/UK deal which has a 10% baseline tariff and then additional tariffs that kick in above a quota level of imports and anything that is less onerous would be an upside surprise for all countries, ex-China. With China, an agree that loosens chip restrictions or lowers absolute levels is a positive
- (iv) Budget / Tax Bill Does Not Spike Bond Yields – Given the US fiscal situation and estimates ~$3.5T increase in the deficit, there is a risk that the backend of the yield curve rises materially especially with the BOJ potentially hiking reducing demand for USTs.
- (v) Earnings Surprise – we have seen estimates cut more than usual this earnings season, so the low bar is set. If Financials and MegaCap Tech beat estimates then that is likely to create momentum into the Aug 28 NVDA report.
BEAR CASE
- (i) Bearish Macro Data – Powell flagged the risk of seeing trade war impacts in the June – Aug data and if that is not reflected in the next batch of macro data we may see Bears start to abandon their recessionary views similar to 2023 and 2024, years where the majority of the Street forecasted a recession
- (ii) Bond Yield Spike – Equities can digest most levels of rates but spikes to bond vol and/or new highs in yields (10Y current cycle high is 5%) take time to digest and a yield spike in relation to hotter inflation data is worse for risk assets than a rise due to increasing growth;
- (iii) Re-escalation of the Trade War – Whether it is China and rare earths or Canada and a digital tax the market still has risks for re-escalation with the most bearish outcome being a reversion to ‘Liberation Day’ levels as the outcome would be a return to the Stagflationary Narrative;
- (iv) Budget / Tax Bill is ‘Rejected’ by Bond Market – while the GOP is using atypical accounting to pitch the bill’s cost ~$450bn, traditional methods place the cost ~$4T and the CBO’s scoring shows a $3.3T cost but with the debt ceiling raised by $5T, the bond market may not treat the bill as a market-friendly.
- (v) Earnings Puke – bull markets are usually ended by a recession or recession-like indictors and in this case we likely need to see negative EPS growth to support the bear case though muddled guidance can have the same impact. Realistically, Bears need MegaCap Tech to see a significant number of misses.
US MKT INTEL VIEW
We remain Tactically Bullish. We think the macro data will deliver enough optimism to keep the SPX poised to create a new series of ATHs. Earnings have a low enough bar, and we think that between Financials and Tech that is enough to carry the market higher throughout the earnings season with the NVDA print just before Labor Day enough to excite investors into Q4. The last pieces to the puzzle are taxes and trade.
- On taxes, we think the bill passes but do not anticipate an immediate, negative reaction from the bond market. Overtime, the bond market may reject US fiscal actions but think this can be reduced if we see a stronger GDP growth profile which we anticipate once there is clarity on the trade war.
- On trade, we do think we see a series of trade agreements hit the tape soon with the impact a reduction in the effective tariff rate, while we may see some turbulence with trade especially if Trump adds Pharma/Semis sectoral tariffs, for now the market will look through those potential events.
Further, we think the July 9 date gets rolled to avoid any market volatility; the Administration is unlikely to let ‘Liberation Day’ levels return given the magnitude of downside in risk assets as ‘Liberation Day’ pushed SPX -10.8% in two days.
RISKS
- (i) NFP downside surprise;
- (ii) Failure to secure trade deals including a re-escalation with Canada, China, and the EU on digital taxes, rare earths, and retaliation for a baseline tariff;
- (iii) Israel/Iran situation devolves pulling the US into the war which could be catalyzed by an Iranian attack on Saudi oil production and/or US military bases.
MONETIZATION MENU
We reiterate our views on last week’s menu, liking longs in MegaCap Tech, Cyclicals, and high beta plays. At the country/region-level, we like Australia, China (Tech), and Japan but think the US will outperform RoW in the near-term.
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