BofA’s Hartnett says concentrated U.S. stock returns are likely to persist
Investing.com -- As President Donald Trump imposes a series of tariffs on various nations globally, JPMorgan Chase & Co. (NYSE:JPM) is preparing for a potential extension of losses in US equities due to the impact of these levies on domestic and international growth. Andrew Tyler, the head of global market intelligence at the firm, anticipates a significant decrease in expectations for US gross domestic product (GDP) and earnings, forcing a revision of year-end forecasts for the S&P 500 Index.
Yesterday, President Trump confirmed the implementation of 25% tariffs on Canada and Mexico, stating that there was no room left for a deal. An additional 10% tariff on China was also announced. The countries have responded with retaliatory measures, further escalating trade tensions and leading to a period of uncertainty. The President’s comments suggest a lack of potential resolution to these escalating tariff issues, raising concerns that these substantial tariffs could push Canada and Mexico into a recession. As a result, US GDP growth expectations may significantly decrease, and earnings revisions could be considerably lower, prompting a reevaluation of year-end forecasts.
Given the uncertainty and potential for a negative feedback loop, JPMorgan’s US Market Intelligence team has shifted their stance to Tactically Bearish. While a US recession is not their base case, they believe the indeterminate duration of tariffs and the potential for an acceleration in new tariffs could challenge the stock market as US GDP growth estimates are reduced.
JPMorgan suggests maintaining a market-neutral or dollar-neutral position, favoring long positions in the UK, China, and Japan, potentially versus short positions in the US. They maintain sector exposure to Financials and a small position in Mag7, recommending clients to be long Defensives either via the JPM basket (JPAMDEFN Index) or via longs in Healthcare and Staples. Elif Korkmaz, a sector specialist at JPMorgan, recommends the JPM Pharma basket (JP1BPHAR Index) as a superior option than ETFs within the Healthcare sector.
The firm also suggested some pairs to consider, including +KWEB vs. -QQQ, +Defensives vs. -Cyclicals, +gold & silver vs. -Basic Materials Equities, +Utilities vs. -Energy, +IG Credit vs. -US Equities, and +Treasuries vs. -US Equities. Despite the current market situation, stronger macro data could delay any calls for a US recession. AVGO/MRVL earnings could potentially turn Mag7 into a safety haven, but the current path of least resistance is lower.
JPMorgan noted that the market was close to a bottom, with cleaner positioning and extremely bearish sentiment. Economic Surprise indices and Bull-Bear Sentiment indicators suggest an increasing chance for a reversal. However, the new 25% tariffs, which now seem to be permanent rather than negotiating tools, introduce a new level of uncertainty as their expiration date is unknown. The ’Trump Put’ appears to be a Treasury market phenomenon, not an Equity market phenomenon.
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