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Investing.com -- JPMorgan said it expects the Eurozone to move toward its next leg higher once markets work through U.S. stagflation risks and a weak European earnings season.
The bank sees “a somewhat stagflationary backdrop” in the U.S. during the second half of the year, with signs that tariffs are starting to push goods prices higher while payroll growth slows below stall speed.
This softer labor market backdrop has brought forward expectations for policy easing, with money markets pricing a 90% chance of a rate cut at the Federal Reserve’s September meeting.
The focus for equities, JPMorgan strategists said, is how the resumption of Fed cuts will affect index-level performance and sector leadership. Cyclical sectors in both the U.S. and Europe have rebounded strongly since April, creating a gap with bond yields.
Historically, the resumption of Fed cuts has been accompanied by lower yields, a softer dollar, and mixed equity performance in the early stages.
“At sector level, Defensives tended to perform better into the resumption of cuts, and in the subsequent 3 months, namely Utilities, Staples and Healthcare, at the expense of Financials and Industrials in particular,” the bank said, adding that Cyclicals typically rebound after this phase.
Emerging markets have tended to benefit as cuts resume, while small caps underperform initially before improving later.
On Europe, JPMorgan said it is “approaching the time to look for the next leg higher” in the Eurozone market. However, it argued that investors first need to work through the twin challenges of U.S. stagflationary risks and “the more mixed European earnings delivery.”
In the second-quarter reporting season, European earnings are once again lagging the U.S.
Many companies in the region have seen weak share price reactions to results, with JPMorgan describing the current period as “a poor European reporting season” and one of the hurdles to clear before the Euro Stoxx 50 index can start to perform better again.