Investing.com -- The polarization in equity markets is likely to extend into 2025 as investors grapple with trade and geopolitical uncertainty, JPMorgan strategists said in a note Wednesday.
The Wall Street firm believes that the first half of the year will be dominated by the impact of rising trade tensions, with US tariffs on Chinese imports likely to escalate.
“Our economists expect Trump to announce 60% tariffs on all Chinese imports in 1Q ’25,” JPMorgan said, a measure expected to pressure emerging markets and commodity-linked assets, especially if the dollar maintains its recent strength.
This backdrop, combined with elevated geopolitical uncertainty, is expected to result in “more mixed equity performance earlier in the year.”
US small-cap stocks, already battered by earnings declines, may see some recovery as business uncertainty eases and deregulation initiatives materialize.
However, the Eurozone's equities remain constrained, with the Stoxx 50 index unable to advance since March, and JPMorgan strategists believe it “will stay stuck, for now.”
The firm expects Eurozone GDP growth below 1% next year, adding to skepticism about consensus earnings projections for the region.
As for emerging markets, strategists maintain a cautious outlook, advising against chasing the gains driven by China's September stimulus. They indicate plans to reassess their stance in the first half of 2025, following developments in tariff-related news.
Meanwhile, the Wall Street giant remains Overweight on Japan, citing domestic reflation, improving wage growth, and an uptick in corporate buybacks as key supportive factors.
Sector-wise, Aerospace and Defense remains a top pick due to structural increases in European defense budgets, even amid potential de-escalation in the Russia-Ukraine conflict, while remaining cautious on China-exposed stocks and exporters.
Other key Overweight sectors include healthcare, software, and real estate.
Overall, strategists see the potential for a convergence trade and improved performance of international stocks relative to US equities in 2025, supported by extreme positioning, valuation gaps, and price divergences.
However, they caution that "we continue to believe that one first needs to get more clarity on trade and on geopolitics fronts, before making the switch."