“Economic data and investor positioning are more important factors for risky asset performance than central bank rhetoric,” the strategists wrote. “We maintain a pro-risk stance.”
Positive sentiment has returned to markets in recent days amid hopes that inflation may have peaked, at least in the US. On Monday, the MSCI AC World Index completed its best four-day surge since May, as traders ready for key US consumer price data Tuesday.
JPMorgan argues that a gradual easing in inflation should be positive for cyclical stocks and small cap names, which it prefers along with emerging-market and Chinese equities over “expensive” defensives. It advocates buying the dip in energy shares and keeps an “aggressive” overweight in commodities.
“We maintain that inflation will resolve on its own as distortions fade and that the Fed has over-reacted with 75bps hike,” the team wrote. “We will likely see a Fed pivot, which is positive for cyclical assets.”
See also: Trade policy turmoil raises recession risk, but long-term equity outlook holds up: Capital Group
The strategists are positive on the dollar and expect US and European bond yield curves to flatten.
JPMorgan is not alone in its view.
Existing data suggest a soft landing is where the global economy is headed, said Isaac Poole, chief investment officer at Oreana Financial Services Ltd., in an interview. “In that scenario, we actually think earnings could be relatively good next year in the US.”
Earnings growth “could surprise on the upside because there has been a lot of pessimism baked in.”
