JPMorgan-US Equity Strategy Fed Easing, Late-Cycle Reflation or Highe...-110700855

Global Markets Strategy08 October 2024J P M O R G A Nwww.jpmorganmarkets.comEquity Macro StrategyDubravko Lakos-Bujas AC(1-212) 622-3601dubravko.lakos-bujas@jpmorgan.comBhupinder Singh(1-212) 622-9812bhupinder.singh@jpmorgan.comKamal Tamboli(1-212) 622-5794kamal.r.tamboli@jpmorgan.comNarendra Singh(1-212) 622-0087narendra.x.singh@jpmorgan.comArun Jain(1-212) 622-9454arun.p.jain@jpmorgan.comJ.P. Morgan Securities LLC J.P. Morgan Research does not provide research coverage of this basket and investors should not expect continuous analysis or additional reports relating to it. Figure 1: JPM Quantitative Macro Index (QMI) – Uptick in September3-6 months ahead of Coincident Indicator-12.0-9.0-6.0-3.00.03.06.09.0-2.5-2.0-1.5-1.0-0.50.00.51.01.5'81'84'87'90'93'96'99'02'05'08'11'14'17'20'23US Quant Macro Index, leads by 3-6months (LHS)Coincident Indicator, YoY% (RHS)Source: J.P. Morgan Equity Macro ResearchFigure 2: Style RecommendationsStyles based on Market Neutral ApproachesSource: J.P. Morgan Equity Macro ResearchFed easing and China stimulus are reviving hopes for a late-cycle reflation trade. Policy support from the world’s largest economies are coming at a time of surprisingly resilient US growth with tight labor markets, ongoing government deficit spending, and record highs across equities, credit, and housing (household wealth has risen by ~$10T over the past year to ~$165T as of 2Q24, +$50T since Covid). S&P 500 earnings growth is expected to accelerate from 3% / yr over the past two years to 12% / yr over the next two years. US corporates have been increasingly focused on recycling pre-tax income into investment spending rather than returning after-tax profits to shareholders through buybacks, which is also helping to stimulate the economy. In an all-out AI arms race, Mag-7 are accelerating investment spending to ~$500b on capex and R&D per year (see Figure 9Mag7 Capex Impacted by Rate Hikes but Now Expected to Acelerate for Next 18 Months. and Figure 10.and Likely Exced Mag7 R&D Next Year). In our view, these drivers, along with US Exceptionalism, are helping offset the uneven macro weakness. Given better-than-expected dataflow post-FOMC, some are starting to question whether the Fed has cornered itself by indicating aggressive easing. If so, the sluggish business cycle could more decisively shift back into recovery, as could animal spirits and inflation with upside to the pro-cyclical trade (see Figure 1JPM Quantitative Macro Index (QMI) – Uptick in September for US QMI and Figure 6Breakeven Inflation Rebounding from Lows for Inflation Breakeven Rates). For a confirmation of a broader recovery, the weakest areas of the economy (e.g., low-income consumers, private sector jobs, manufacturing, retail) will need to show improvement going into the holiday season (see Figure 40US Consumer Lagards with Brand Value (JPAMBRND <Index>) for US Consumer Laggards with Brand Value). Moreover, if the market continues to backpedal on rate cut expectations (