Equity Research
Equity Strategy : USD, bond yields, oil and concentration all showing elevated risks remains a problematic backdrop
April 22, 2024
Equity Strategy : USD, bond yields, oil and concentration all showing elevated risks remains a problematic backdrop
Equity Strategy : USD, bond yields, oil and concentration all showing elevated risks remains a problematic backdrop
This document is being provided for the exclusive use of spencer.wall@jpmorgan.com & clients of J.P. Morgan.
22 April 2024

Equity Strategy

USD, bond yields, oil and concentration all showing elevated risks remains a problematic backdrop

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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The ytd move higher in USD is consistent with weaker equity markets…

…bond yields rising from current levels should not be taken well by stocks… the P/Es vs real yields gap is already wide...

…oil price is up 15% ytd, and could pressure inflation expectations higher… US supercore CPI run rate is at 8%, approaching 2022 highs

Source: Datastream, Bloomberg Finance L.P.

  • The multiple expansion seen in past months, extremely low volatility metrics up to recently, tightest credit spreads since 2007, and the general inability by market participants earlier in the year to identify any potential negative catalysts for stocks are starting to shift.
  • We remain concerned about continued complacency in equity valuations, inflation staying too hot, further Fed repricing, rates moving higher for the “wrong reasons”, about profit outlook where the implied acceleration this year might end up too optimistic, high market concentration, as well as about the potential further escalation in geopolitical uncertainty.
  • USD advanced ytd, and that was historically a challenge for equities, with the two exhibiting a clear inverse correlation - see top chart. The gap that opened up so far this year, where equities rallied despite stronger USD, might end up closing.
  • This is in addition to Fed futures vs equities gap that we have been highlighting in past weeks. Last October, when S&P500 was at 4200, Fed was priced to cut rates 70-80bp this year. At the point of peak dovishness in January, this moved to as much as 180bp of cuts for 2024. Today’s market pricing of only 40bp of cuts is below the starting point of last October. Our view remains that bond yields going higher from current levels will not be taken well by the equity market, similar to what transpired last summer when S&P500 had a 10% drawdown. The P/Es vs real yields gap is already meaningful - middle chart.
  • Oil stabilized last week, but it is still up 15% ytd, and gasoline prices are increasing. While earlier in the year one could have ascribed energy appreciation to activity improvement, the most recent moves are mostly supply driven, and pricing in the increased geopolitical risk premia. This comes at a bad time, when the Fed’s declared victory over inflation, the call that Jan-Feb CPI move back up is transitory, could end up questioned. US Supercore CPI 3 month run rate is at 8%, nearing 2022 highs.
  • Market concentration has been very high, and positioning extended, which are typically red flags, at risk of a reversal. Broadly, the combination of macro factors outlined above, any move higher in USD, yields or in Brent, together with continued elevated geopolitical uncertainty, increases the downside risks, and suggests that more Defensive trading should be appropriate.
  • We held a long-standing OW on Growth vs Value, OW Quality, and preference for Large Caps, alongside regional trades of OW US vs Europe and EM, even as we have this year tactically closed our bearish China call, and have in Q1 closed our US vs Eurozone preference. We stay with Quality, but Growth remains at risk of a reversal, and large caps are outperforming small everywhere again ytd. We argued recently that Defensives such as Utilities are likely to pick up even in the event of rising bond yields, as this might lead to lower beta trading. Healthcare tended to benefit from stronger USD. Some of the reduced beta has been in motion of late, alongside OW on Energy.

USD, bond yields and oil all moving higher remains a problematic combination

The Goldilocks narrative that the market embraced at the start of the year might get challenged...

Table 1: Key regions - Current vs Oct ’23 P/E and change in EPS

Key regions Current PE Oct'23 PE % change % change in 12m Fwd EPS
Eurozone 12.8 10.9 17% 3%
US 20.3 17.5 16% 5%
World 17.7 15.3 16% 4%
Europe 13.2 11.5 15% 2%
UK 11.2 9.9 14% -5%
Japan 15.1 13.9 9% 10%
EM 11.8 11.1 6% 4%
China 9.1 9.5 -4% 0%

Source: IBES

Equities enjoyed a dramatic multiple expansion since October of last year, driven by pivot hopes.

Figure 1: VIX

Source: Bloomberg Finance L.P.

Until very recently, volatility was near record lows.

Figure 2: Gap between spread on US bonds rated B and BBB

Source: Bloomberg Finance L.P.

The spread between BBB and B bonds was close to the lowest levels since 2007, also indicating optimistic investor sentiment.

Figure 3: Recession probability indicator

Source: J.P. Morgan.

Similarly, our recession probability indicator showed that the market isn’t pricing in any meaningful risk of a downturn over the next year anymore.

...we worry about the complacency in equity markets

Figure 4: MSCI World ytd

Source: Bloomberg Finance L.P.

The positive market picture is starting to change. A combination of high inflation prints in the US and the rise in geopolitical tensions is contributing to this.

Figure 5: MSCI World 12m Fwd earnings yield minus Global Govt. bond index yield

Source: Datastream

Equities were stretched vs fixed income, with EY-BY gap the least attractive since 2007.

Figure 6: SPW 12m Fwd P/E and US 10Y real yield

Source: Bloomberg Finance L.P.

If bond yields move further up, that would not be positive for equities, especially given the already stretched valuation starting point.

Figure 7: S&P500 Quarterly EPS expectations

Source: Thomson Reuters

We do not think that P/Es can drive further equity upside without the support of earnings upgrades. Investors are expecting S&P500 EPS to accelerate by almost 20% by Q4 compared to the projected Q1 ‘24 levels. That hurdle rate is too steep in our opinion.

A stronger dollar is usually a problem for equities

Figure 8: DXY

Source: Bloomberg Finance L.P.

USD had advanced so far ytd.

Figure 9: MSCI World and DXY since Jan’22

Source: Datastream, Bloomberg Finance L.P.

The peaks and troughs in the dollar have more or less coincided with the troughs and peaks in equities. Most recently, even though the dollar bottomed at the end of December, equities continued to rally.

Figure 10: MSCI World and DXY

Source: Bloomberg Finance L.P., Datastream

Historically, equities and the dollar exhibited a strong inverse correlation. In this context, the year-to-date divergence is quite notable. We believe that if the dollar continues to trend higher, equities will struggle.

Table 2: JPM DXY forecasts

Forecast for end of
18-Apr-24 Jun 24 Sep 24
DXY 106.2 106.4 106.1

Source: J.P. Morgan.

JPM FX team is looking for stronger USD from here.

The gap between Fed futures and equities remains formidable

Figure 11: SPX and fed funds futures

Source: Bloomberg Finance L.P.

So far, the repricing in Fed expectations has been largely ignored by the market.

Table 3: Market expected Fed rate cut - Current vs Jan’24

Meeting 12th Jan'24 Current
01/31/2024 0 -
03/20/2024 -21 -
05/01/2024 -30 -1
06/12/2024 -32 -4
07/31/2024 -26 -8
09/18/2024 -25 -11
11/07/2024 -18 -6
12/18/2024 -17 -12
2024 cumulative cuts -169 -42

Source: Bloomberg Finance L.P.

As of the 12th of January, the market was pricing in almost 170bp of cuts for this year. This dropped to just over 40bp at present.

Figure 12: SPX and US 10Y bond yield

Source: Bloomberg Finance L.P.

Our view is that a continued move higher in yields will be problematic for equities. Last year, when yields moved from 3.9% to 5%, S&P500 had a 10% drawdown.

Figure 13: US 10Y Term Premia

Source: J.P. Morgan.

It is interesting to note that term premia is still negative, suggesting that most expect inflation to start moving lower once again. The risk of further disappointments remains high.

Higher oil prices could further delay the roll-back in inflation

Figure 14: Brent

Source: Bloomberg Finance L.P.

Oil prices are up almost 15% year to date. While earlier in the year oil prices moved up on account of more optimistic demand projections, the more recent rise is driven by supply considerations and rising geopolitical risk premia.

Figure 15: Brent and US Gasoline ytd

Source: Bloomberg Finance L.P.

US gasoline prices have broadly tracked the rise in oil prices.

Figure 16: Brent and US 5Y Inflation forwards

Source: Bloomberg Finance L.P.

Brent and inflation forwards exhibit a strong positive correlation. Inflation could remain sticky at or above current levels unless oil prices move lower.

Figure 17: US supercore CPI

Source: Bloomberg Finance L.P.

Indeed, super-core CPI in the US has gone up sharply year to date, approaching 2022 highs.

Narrow market breadth is likely to amplify any negative moves, together with elevated positioning

Figure 18: SPX and SXXP Momentum factor

Source: Bloomberg Finance L.P.

Momentum factor has been performing extremely well in both Europe and the US ytd.

Figure 19: Correlation between momentum and size - US

Source: JPM US Equity Strategy

The correlation between momentum and size factors is at elevated levels, suggesting that stocks with bigger index weights are driving the momentum rally.

Figure 20: Correlation between momentum and size - Europe

Source: JPM US Equity Strategy

This is true for Europe as well, although not to the same extent.

Figure 21: Magnificent 7 share of S&P500

Source: Datastream

Top 7 stocks in the US account for almost 30% of market cap currently. We believe this is relatively unhealthy setup for the market. If momentum factor starts unwinding, it is likely to drag the overall market lower given the weight of underlying stocks in that cohort.

Figure 22: Regional Net Flows - Cumulative

Source: J.P.Morgan Positioning Intelligence

Equities have received strong inflows in last few months, particularly in the US.

Figure 23: SPX mini futures positioning

Source: JPM Flows & Liquidity team

S&P500 positioning proxy based on cumulative daily changes in S&P500 mini futures open interest multiplied by the sign of the price change suggest that equity exposure, particularly among tactical investors i.e. hedge funds etc, is already quite elevated and even higher than what was observed at the end of 2021.

Figure 24: Positions in US equity futures by Asset Managers

Source: JPM Flows & Liquidity team

Another positioning measure devised by our Flows and Liquidity team tracking US equity futures position of US asset managers is also quite stretched.

We continue to prefer Growth style over Value, even as we accept the risk of a reversal is high...

Figure 25: MSCI US and Europe Growth vs Value

Source: Datastream

In terms of our style preferences, we favoured Growth over Value style through last year, and again so far year to date.

Figure 26: MSCI World Growth vs Value 12m Fwd EPS

Source: Datastream

Growth style is supported by the continued better earnings delivery vs Value.

...and large caps over small caps

Table 4: Large vs Small caps ytd performance for key regions

% ytd perf
MSCI US Small Cap -3.2%
Large Cap 4.8%
MSCI UK Small Cap -1.2%
Large Cap 1.8%
MSCI Eurozone Small Cap 1.8%
Large Cap 6.9%
MSCI Japan Small Cap 9.2%
Large Cap 14.0%

Source: Datastream

We also held a preference for large caps over small caps. Small caps are trailing large caps in all key regions so far this year.

Defensive stocks are likely to trade better from here regardless of the direction of yields

Figure 27: European Cyclicals vs Defensives 12m Fwd PE relative

Source: IBES

At sector level, Cyclicals have rerated to outright expensive vs Defensives. Even if bond yields go higher from here, we think that the equity market will not like it, leading to a potential low beta outperformance.

Figure 28: MSCI Europe Utilities 12m Fwd P/E relative

Source: IBES

Utilities in particular have de-rated to record cheap valuations.

Figure 29: MSCI Europe Healthcare 12m Fwd P/E rel

Source: IBES

Healthcare is another sector which has de-rated significantly.

Figure 30: MSCI Europe Healthcare relative and JPM Tradeable USD

Source: Datastream

If the USD strengthens, Healthcare stands to benefit.

Figure 31: Cyclicals EPS relative to Defensives vs IFO

Source: IBES, Datastream

In general, Cyclical earnings could underwhelm versus Defensives, judging by IFO direction.

Figure 32: Stoxx 600 sectors beta to market

Source: Bloomberg Finance L.P.

If yields stay higher for longer on account of elevated inflationary pressures, then the low beta nature of Defensives would make them a good hedge against potential market downside.

Figure 33: European sectors correlation to US 10Y bond yield

Source: Bloomberg Finance L.P.

On the other hand, it is the Defensive sectors that are best placed to benefit if yields move lower given the sharp inverse correlation.

Figure 34: European Energy 12m Fwd P/E relative

Source: IBES

We believe that Energy is also remaining attractive given strong FCF yield, very cheap valuations and the useful property of being a geopolitical hedge.

Regionally, we recently took profits on our preference for US equities over Eurozone, and on the China UW

Figure 35: YTD performance for key regions

Source: Datastream

We favoured US over EM and Europe, but have recently adjusted some of the bets.

Figure 36: MSCI Eurozone vs US relative performance

Source: Datastream

We held a preference for US stocks over Eurozone since May of last year. As Eurozone lagged since then, we decided to neutralize the trade.

Figure 37: MSCI Eurozone sector neutral P/E vs MSCI US

Source: IBES

Eurozone at 13x is cheap vs the US at 21x, and the ECB could start moving ahead of the Fed this time around.

Figure 38: MSCI China

Source: Datastream

In Q1, we also closed our long-standing bearish China call, given the significant weakness already seen.

Figure 39: MSCI China 12m Fwd PE relative to MSCI World

Source: IBES

At 9x forward, Chinese equities are far from pricing in any optimism.

Equity Strategy Key Calls and Drivers

In terms of leadership, US and Japan are ahead of other markets ytd, Growth is outperforming Value and large caps are again beating small, in all key regions. We continue to believe that this style of leadership will broadly stay the case for a while longer, until there is a break, or a rest, in the cycle. For Value, low Quality, small caps or EM stocks to begin leading more sustainably one needs to see a reflationary backdrop, in our view, but we could see the opposite. Within this, we have recently taken profits on US vs Eurozone OW, as the Eurozone risk-reward has improved, in our view. Among other things?, Eurozone valuations appear very attractive, relative growth momentum could be bottoming out and ECB could start moving ahead of the Fed, which would be very atypical. We also have a tactical buy on China given extreme cheapness and UW positioning by most investors. Broadly, JPM Fixed Income’s call is that bond yields are fundamentally set to move lower in 2H, but we note a pickup in inflation swaps as well as the outright negative term premia for bonds again, which suggest that there is a lot of complacency in the bond market with respect to the inflation risk. Consequently, the gap that has opened up ytd between Fed futures and the equity market is getting wider. Equities rallied almost 30% from last October’s lows, driven in Nov-Dec by the expectation of a Fed pivot, but these projections have fully reversed back to October low levels. Equities are ignoring the most recent pivot of a pivot RIGHT WORD?, which might be a mistake. The assumption that the market is likely making here is one of growth acceleration coming to the rescue in 2H. In this regard, we note that earnings projections for 2024 are still not moving up. Regionally, Japan is staying our top pick, continuing our 2023 preference.

Table 5: J.P. Morgan Equity Strategy — Factors driving our medium-term views

Driver Impact Our Core Working Assumptions Recent Developments
Global Growth Neutral At risk of weakening as consumer strength wanes Global composite PMI is at 52.3
European Growth Negative Manufacturing and services are converging on the downside; industry data stays weak  
Monetary Policy Neutral Fed pivot could be accompanied by activity weakness  
Currency Neutral USD could strengthen again  
Earnings Negative Corporate pricing power is likely to weaken from here 2024 EPS projections are continuing their downtrend
Valuations Negative At 21x, US forward P/E is still stretched, especially vs real yield  MSCI Europe on 13.2x Fwd P/E
Technicals Negative Sentiment and positioning are stretched post the Nov-Dec rally RSIs are in overbought territory

Source: J.P. Morgan estimates

Table 6: : Base Case and Risk

Scenario Assumption
Upside scenario No further hawkish tilt by the Fed. No landing
Base-case scenario Inflation to fall further, risk of downturn still elevated. Earnings downside from here
Downside scenario Further Fed tightening and global recession to become a base case again

Source: J.P. Morgan estimates.

Table 7: Index targets

Dec '24
Target		 18-Apr-24 % upside
MSCI Eurozone 256 291 -12%
FTSE 100 7,700 7,877 -2%
MSCI EUROPE 1,850 2,012 -8%
DJ EURO STOXX 50 4,250 4,937 -14%
DJ STOXX 600 E 460 500 -8%

Source: J.P. Morgan.

Table 8: Key Global sector calls

Overweight Neutral Underweight
Healthcare Technology Capital Goods ex A&D
Telecoms Discretionary Food& Drug Retail
Food, Beverage & Tobacco Mining Autos
Real Estate Transportation Banks
Utilities

Source: J.P. Morgan

Table 9: J.P. Morgan Equity Strategy — Key sector calls*

Sector Recommendations Key Drivers
Healthcare Overweight Potential for lower yields and stronger dollar remain near term support, earnings are also holding up
Staples Overweight Sector is one of the best performers around the last Fed hike in the cycle, lower bond yields and better relative EPS momentum should further support
Banks Underweight Downgraded to UW in October after 3 years of strong performance. Bond yields and PMIs direction is the key for the potential P/E re-rating of the sector, we think both will move lower
Chemicals Underweight The sector trades at 70% premium to the market, well above historical norm. pricing continues to deteriorate, downside risks to current earnings and margin projections

Source: J.P. Morgan estimates. * Please see the last page for the full list of our calls and sector allocation.

Table 10: J.P. Morgan Equity Strategy — Key regional calls

Region Recommendations J.P. Morgan Views
EM Neutral China tactical chance for a bounce, but structural bearish call remains
DM Neutral  
    US Neutral Expensive, with earnings risk. Growth style at a risk of reversal
    Japan Overweight Japan is attractively priced; diverging policy path and TSE reforms are tailwinds
    Eurozone Neutral Eurozone trading at a record discount vs the US; Growth differential to improve
    UK Overweight Valuations still look very attractive, low beta with the highest regional dividend yield

Source: J.P. Morgan estimates.

Top Picks

Table 11: J.P. Morgan European Strategy: Top European picks

Source: Datastream, MSCI, IBES, J.P. Morgan, Prices and Valuations as of COB 18th Apr, 2024. Past performance is not indicative of future returns.

Please see the most recent company-specific research published by J.P. Morgan for an analysis of valuation methodology and risks on companies recommended in this report. Research is available at http://www.jpmorganmarkets.com, or you can contact the cover

Equity Flows Snapshot

Table 12: DM Equity Fund Flows Summary

Regional equity fund flows
$mn % AUM
1w 1m 3m ytd 12m 1w 1m 3m ytd 12m
Europe ex UK -340 1 -710 -1,505 -12,319 -0.1% 0.0% -0.2% -0.5% -3.9%
UK -547 -1,397 -6,593 -7,319 -28,699 -0.2% -0.5% -2.5% -2.7% -10.3%
US -4,056 3,017 70,428 61,223 205,722 0.0% 0.0% 0.7% 0.6% 2.5%
Japan -641 2,390 10,081 11,564 24,599 -0.1% 0.3% 1.3% 1.5% 3.7%

Source: EPFR, as of 17th Apr, 2024

Figure 40: DM Equity Fund flows – last month

Source: EPFR, Japan includes BoJ purchases.

Figure 41: DM Equity Fund flows – last 12 months

Source: EPFR, Japan includes BoJ purchases.

Figure 42: Cumulative fund flows into regional funds as a percentage of AUM

Source: EPFR, as of 17th Apr, 2024. Japan includes Non-ETF purchases only.

Figure 43: Cumulative fund flows into regional equity ETFs as a percentage of AUM

Source: Bloomberg Finance L.P. *Based on the 25 biggest ETF's with a mandate to invest in that particular region. Japan includes BoJ purchases.

Technical Indicators

Figure 44: S&P500 RSI

Source: Bloomberg Finance L.P.

Figure 45: EuroStoxx50 RSI

Source: Bloomberg Finance L.P.

Figure 46: AAII Bull-Bear

Source: Bloomberg Finance L.P

Figure 47: Put-call ratio

Source: Bloomberg Finance L.P.

Figure 48: Sentix Sentiment Index vs SX5E

Source: Bloomberg Finance L.P.

Figure 49: Equity Skew

Source: Bloomberg Finance L.P.

Figure 50: Speculative positions in S&P500 futures contracts

Source: Bloomberg Finance L.P.

Figure 51: VIX

Source: Bloomberg Finance L.P.

Performance

Table 13: Sector Index Performances — MSCI Europe

Source: MSCI, Datastream, as at COB 18th Apr, 2024.

Table 14: Country and Region Index Performances

(%change) Local Currency US$
Country Index 4week 12m YTD 4week 12m YTD
Austria ATX 1.6 8.0 3.0 (0.3) 5.0 (0.6)
Belgium BEL 20 1.0 (0.1) 3.2 (0.9) (2.9) (0.4)
Denmark KFX (3.5) 23.3 13.7 (5.4) 19.6 9.5
Finland HEX 20 (0.9) (9.9) (3.3) (2.8) (12.4) (6.7)
France CAC 40 (1.9) 6.5 6.4 (3.8) 3.5 2.6
Germany DAX (1.9) 12.3 6.5 (3.7) 9.2 2.7
Greece ASE General (3.4) 23.3 6.8 (5.3) 19.8 3.0
Ireland ISEQ 0.4 17.2 13.5 (1.5) 14.0 9.5
Italy FTSE MIB (1.3) 21.5 11.6 (3.2) 18.1 7.7
Japan Topix (4.2) 31.2 13.1 (6.1) 13.6 3.2
Netherlands AEX (1.1) 13.4 10.0 (3.0) 10.2 6.1
Norway OBX 2.8 5.9 4.2 (0.5) 0.5 (4.0)
Portugal BVL GEN 2.2 (11.4) (11.1) 0.2 (13.9) (14.2)
Spain IBEX 35 (0.9) 14.3 6.6 (2.8) 11.1 2.8
Sweden OMX (1.3) 11.6 5.1 (5.6) 5.2 (3.2)
Switzerland SMI (4.0) (1.1) 0.8 (5.4) (2.7) (7.0)
United States S&P 500 (4.4) 20.6 5.1 (4.4) 20.6 5.1
United States NASDAQ (4.9) 28.4 3.9 (4.9) 28.4 3.9
United Kingdom FTSE 100 (0.1) (0.4) 1.9 (1.8) (0.3) (0.6)
EMU MSCI EMU (2.0) 8.9 6.9 (3.9) 5.9 3.1
Europe MSCI Europe (2.0) 5.7 5.0 (3.8) 3.4 0.6
Global MSCI AC World (4.0) 17.4 5.1 (4.5) 15.7 3.5

Source: MSCI, Datastream, as at COB 18th Apr, 2024.

Earnings

Table 15: IBES Consensus EPS Sector Forecasts — MSCI Europe

EPS Growth (%yoy)
2023 2024E 2025E 2026E
Europe (3.6) 3.5 10.2 9.1
Energy (31.6) (4.5) 3.1 4.0
Materials (38.8) 5.8 12.5 7.1
Chemicals (38.9) 24.3 19.1 12.2
Construction Materials 11.8 11.8 9.9 7.7
Metals & Mining (46.2) (6.5) 5.6 2.0
Industrials 0.9 7.4 13.7 11.9
Capital Goods 22.2 11.7 13.6 11.7
Transport (55.0) (24.3) 19.1 15.4
Business Svs 3.2 8.8 11.0 10.9
Discretionary 8.0 2.5 10.6 9.6
Automobile 3.3 (3.0) 5.4 6.5
Consumer Durables (5.8) 4.7 15.1 13.3
Media 1.2 7.4 10.2 10.7
Retailing 52.6 13.4 17.2 8.4
Hotels,Restaurants&Leisure 85.6 21.4 21.0 16.6
Staples 2.5 2.6 8.9 8.0
Food & Drug Retailing 4.7 4.8 11.8 8.6
Food Beverage & Tobacco 2.1 1.4 8.9 8.1
Household Products 2.9 5.0 7.7 7.5
Healthcare 1.2 6.1 14.4 10.4
Financials 15.5 5.7 8.0 10.0
Banks 28.5 0.8 4.6 7.2
Diversified Financials (20.0) 16.4 22.6 24.5
Insurance 11.7 12.6 8.3 8.1
Real Estate 5.8 2.9 3.5 2.5
IT 14.0 (5.4) 30.0 15.3
Software and Services 18.5 (0.1) 20.7 14.0
Technology Hardware (20.6) 9.1 9.6 9.7
Semicon & Semicon Equip 27.9 (12.9) 44.1 17.6
Telecoms (8.9) 10.5 10.8 8.8
Utilities (0.2) (0.2) 1.1 2.2

Source: IBES, MSCI, Datastream. As at COB 18th Apr, 2024.

Table 16: IBES Consensus EPS Country Forecasts

EPS growth (%change)
Country Index 2023 2024E 2025E 2026E
Austria ATX (20.6) (0.7) 5.1 4.6
Belgium BEL 20 13.3 (6.3) 12.2 13.3
Denmark Denmark KFX (14.8) 26.4 22.1 17.9
Finland MSCI Finland (25.1) 3.3 12.2 8.1
France CAC 40 (2.4) 2.5 8.8 8.2
Germany DAX 0.2 1.8 12.1 10.9
Greece MSCI Greece 4.2 3.6 2.4 16.6
Ireland MSCI Ireland 32.5 (1.8) 3.1 6.2
Italy MSCI Italy 8.6 2.0 2.8 4.0
Netherlands AEX (1.6) 0.9 12.9 8.8
Norway MSCI Norway (40.4) 3.0 6.1 2.2
Portugal MSCI Portugal 16.9 14.2 4.8 5.3
Spain IBEX 35 8.2 2.4 4.1 6.4
Sweden OMX 31.6 1.2 8.3 6.8
Switzerland SMI (4.6) 9.8 13.9 10.7
United Kingdom FTSE 100 (10.7) 0.9 8.1 8.4
EMU MSCI EMU 3.5 3.1 10.2 9.0
Europe ex UK MSCI Europe ex UK 0.4 4.4 11.1 9.4
Europe MSCI Europe (3.6) 3.5 10.2 9.1
United States S&P 500 2.3 9.3 14.4 11.7
Japan Topix 2.8 15.4 9.8 9.3
Emerging Market MSCI EM (7.5) 19.8 15.4 11.1
Global MSCI AC World (0.2) 9.0 13.1 10.8

Source: IBES, MSCI, Datastream. As at COB 18th Apr, 2024** Japan refers to the period from March in the year stated to March in the following year – EPS post-goodwill

Valuations

Table 17: IBES Consensus European Sector Valuations

P/E Dividend Yield EV/EBITDA Price to Book
2024e 2025e 2026e 2024e 2025e 2026e 2024e 2025e 2026e 2024e 2025e 2026e
Europe 13.7 12.4 11.4 3.4% 3.6% 3.9% 8.1 7.5 7.0 1.9 1.8 1.6
Energy 8.0 7.8 7.5 5.3% 5.2% 5.5% 3.4 3.4 3.3 1.2 1.1 1.1
Materials 15.8 14.1 13.2 3.1% 3.4% 3.6% 7.7 6.9 6.7 1.7 1.6 1.5
Chemicals 23.4 19.7 17.5 2.7% 2.9% 3.0% 11.5 10.4 9.6 2.4 2.3 2.1
Construction Materials 13.1 12.0 11.1 2.9% 3.1% 3.3% 7.7 7.1 6.5 1.7 1.6 1.5
Metals & Mining 10.9 10.3 10.2 3.8% 4.1% 4.5% 5.2 4.5 4.7 1.3 1.2 1.1
Industrials 19.1 16.8 15.0 2.4% 2.6% 2.9% 10.3 9.2 8.3 3.2 3.0 2.7
Capital Goods 19.0 16.8 15.0 2.3% 2.5% 2.8% 10.7 9.5 8.6 3.4 3.2 2.9
Transport 16.9 14.2 12.3 3.4% 3.7% 3.7% 7.3 6.6 5.9 1.6 1.6 1.5
Business Svs 20.9 18.9 17.0 2.5% 2.7% 2.9% 12.8 11.7 10.8 6.0 5.5 4.9
Discretionary 13.1 11.9 10.8 2.7% 3.0% 3.3% 5.6 5.1 4.8 1.9 1.8 1.5
Automobile 6.3 6.0 5.6 4.9% 5.2% 5.5% 2.0 1.8 1.7 0.8 0.7 0.6
Consumer Durables 23.5 20.5 18.1 1.8% 2.0% 2.3% 14.5 12.9 11.5 4.3 3.8 3.5
Media & Entertainment 16.3 14.8 13.4 2.3% 2.5% 2.7% 11.9 10.0 9.0 1.8 1.8 1.9
Retailing 15.1 12.9 11.9 2.4% 2.6% 2.9% 10.5 9.6 9.0 2.9 2.8 2.2
Hotels,Restaurants&Leisure 22.1 18.2 15.6 2.2% 2.6% 3.0% 12.4 10.4 9.5 4.2 3.8 3.5
Staples 16.2 14.9 13.8 3.2% 3.4% 3.7% 10.6 9.9 9.1 2.8 2.6 2.5
Food & Drug Retailing 11.4 10.2 9.4 4.3% 4.6% 5.0% 6.0 5.6 5.3 1.5 1.5 1.4
Food Beverage & Tobacco 16.0 14.7 13.6 3.5% 3.8% 4.0% 10.5 9.8 9.0 2.5 2.4 2.3
Household Products 18.7 17.4 16.2 2.5% 2.7% 2.8% 13.5 12.5 11.8 4.1 3.8 3.8
Healthcare 17.1 15.0 13.6 2.4% 2.7% 3.0% 12.4 10.9 9.6 3.4 3.1 2.8
Financials 8.9 8.2 7.5 5.6% 5.7% 6.2% - - - 1.1 1.0 0.9
Banks 7.1 6.7 6.3 7.2% 7.1% 7.6% - - - 0.8 0.7 0.7
Diversified Financials 14.3 11.7 9.6 2.4% 2.7% 3.0% - - - 1.3 1.4 1.4
Insurance 10.2 9.4 8.7 5.7% 6.1% 6.6% - - - 1.6 1.5 1.5
Real Estate 13.4 13.0 12.6 4.3% 4.5% 4.8% - - - 0.8 0.8 0.8
IT 28.4 21.8 18.9 1.2% 1.3% 1.5% 18.6 14.4 12.6 4.9 4.4 3.9
Software and Services 29.0 24.0 21.1 1.3% 1.4% 1.6% 19.6 15.8 13.9 4.4 4.0 3.6
Technology Hardware 14.8 13.5 12.3 2.7% 2.8% 3.0% 8.7 8.1 7.0 1.8 1.7 1.6
Semicon & Semicon Equip 33.0 22.9 19.5 0.9% 1.0% 1.2% 22.5 15.6 13.5 8.1 6.7 5.6
Communication Services 13.6 12.3 11.3 4.4% 4.5% 4.8% 6.7 6.2 5.8 1.4 1.3 1.3
Utilities 11.8 11.7 11.4 5.2% 5.3% 5.6% 7.9 8.1 8.2 1.5 1.4 1.3

Source: IBES, MSCI, Datastream. As at COB 18th Apr, 2024.

Table 18: IBES Consensus P/E and 12-Month Forward Dividend Yields — Country Forecasts

P/E Dividend Yield
Country Index 12mth Fwd 2024E 2025E 2026E 12mth Fwd
Austria ATX 7.8 7.9 7.5 7.0 5.9%
Belgium BEL 20 15.1 15.7 14.0 12.3 3.0%
Denmark Denmark KFX 26.6 28.6 23.4 19.9 1.7%
Finland MSCI Finland 14.4 15.0 13.4 12.4 4.6%
France CAC 40 13.2 13.6 12.5 11.5 3.3%
Germany DAX 12.0 12.5 11.1 10.0 3.3%
Greece MSCI Greece 29.9 30.1 29.4 24.3 1.8%
Ireland MSCI Ireland 11.1 11.2 10.9 10.2 3.5%
Italy MSCI Italy 9.0 9.1 8.9 8.5 5.5%
Netherlands AEX 15.3 15.8 14.0 13.2 2.5%
Norway MSCI Norway 10.8 11.0 10.4 10.2 6.2%
Portugal MSCI Portugal 13.9 14.1 13.4 12.8 4.2%
Spain IBEX 35 10.8 11.0 10.5 9.9 4.8%
Sweden OMX 15.2 15.6 14.4 13.6 3.8%
Switzerland SMI 16.3 17.0 15.0 13.5 3.5%
United Kingdom FTSE 100 11.1 11.4 10.5 9.7 4.1%
EMU MSCI EMU 13.1 13.5 12.3 11.3 3.4%
Europe ex UK MSCI Europe ex UK 14.1 14.6 13.1 12.0 3.4%
Europe MSCI Europe 13.2 13.7 12.4 11.4 3.6%
United States S&P 500 20.0 21.2 18.5 16.6 1.5%
Japan Topix 14.6 16.2 14.7 13.5 2.3%
Emerging Market MSCI EM 12.2 12.8 10.7 9.9 3.1%
Global MSCI AC World 17.5 18.3 15.6 14.7 2.1%

Source: IBES, MSCI, Datastream. As at COB 18th Apr, 2024; ** Japan refers to the period from March in the year stated to March in the following year – P/E post goodwill.

Economic, Interest Rate and Exchange Rate Outlook

Table 19: Economic Outlook in Summary

Real GDP Real GDP Consumer prices
% oya % over previous period, saar % oya
2023E 2024E 2025E 3Q23 4Q23 1Q24E 2Q24E 3Q24E 4Q24E 4Q23 2Q24E 4Q24E 2Q25E
United States 2.5 2.4 1.7 4.9 3.4 2.3 1.5 1.0 1.0 3.2 3.5 3.3 2.4
Eurozone 0.5 0.4 1.0 -0.2 -0.2 0.5 0.7 0.7 0.7 2.7 2.6 2.2 1.7
United Kingdom 0.1 0.2 0.1 -0.5 -1.2 1.5 0.8 0.0 -0.5 4.2 1.9 2.4 2.5
Japan 1.9 0.7 0.8 -3.2 0.4 1.0 1.7 1.0 0.8 2.9 3.2 3.1 2.6
Emerging markets 4.2 4.1 3.6 5.8 3.9 5.5 3.4 3.6 3.6 3.7 4.1 3.5 3.3
Global 2.7 2.6 2.3 3.6 2.6 3.3 2.1 2.1 2.0 3.4 3.5 3.1 2.7

Source: J.P. Morgan economic research J.P. Morgan estimates, as of COB 11th Apr, 2024

Table 20: Official Rates Outlook

Forecast for
Official interest rate Current Last change (bp) Forecast next change (bp) Jun 24 Sep 24 Dec 24 Mar 25
United States Federal funds rate 5.50 26 Jul 23 (+25bp) Jun 24 (-25bp) 5.25 5.00 4.75 4.50
Eurozone Depo rate 4.00 14 Sep 23 (+25bp) Jun 24 (-25bp) 3.75 3.50 3.00 2.50
United Kingdom Bank Rate 5.25 03 Aug 23 (+25bp) Aug 24 (-25bp) 5.25 5.00 4.50 4.00
Japan Pol rate IOER 0.10 19 Mar 24 (+20bp) 3Q24 (+15bp) 0.10 0.25 0.50 0.50

Source: J.P. Morgan estimates, Datastream, as of COB 11th Apr, 2024

Table 21: 10-Year Government Bond Yield Forecasts

10 Yr Govt BY Forecast for end of
19-Apr-24 Jun 24 Sep 24 Dec 24 Mar 25
US 4.59 4.15 4.05 4.00 3.90
Euro Area 2.47 2.20 2.05 1.90 1.80
United Kingdom 4.25 4.05 3.95 3.80 3.65
Japan 0.85 0.85 1.05 1.30 1.30

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 11th Apr, 2024

Table 22: Exchange Rate Forecasts vs. US Dollar

Exchange rates vs US$ Forecast for end of
18-Apr-24 Jun 24 Sep 24 Dec 24 Mar 25
EUR 1.07 1.05 1.05 1.09 1.12
GBP 1.24 1.22 1.22 1.25 1.29
CHF 0.91 0.92 0.91 0.89 0.87
JPY 155 148 146 144 142
DXY 106.2 106.4 106.1 102.9 100.3

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 11th Apr, 2024

Sector, Regional and Asset Class Allocations

Table 23: J.P. Morgan Equity Strategy — European Sector Allocation

MSCI Europe Weights Allocation Deviation Recommendation
Energy 5.6% 8.0% 2.4% OW
Materials 7.0% 6.0% -1.0% N
Chemicals UW
Construction Materials N
Metals & Mining N
Industrials 15.8% 14.0% -1.8% N
Capital Goods ex Aerospace & Defence UW
Aerospace & Defence OW
Transport N
Business Services N
Consumer Discretionary 9.1% 7.0% -2.1% UW
Automobile UW
Consumer Durables N
Consumer Srvcs UW
Speciality Retail UW
Internet Retail UW
Consumer Staples 11.7% 13.0% 1.3% OW
Food & Drug Retailing UW
Beverages OW
Food & Tobacco OW
Household Products OW
Healthcare 16.0% 18.0% 2.0% OW
Financials 18.1% 14.0% -4.1% UW
Banks UW
Insurance N
Real Estate 0.9% 2.0% 1.1% OW
Information Technology 7.1% 7.0% -0.1% N
Software and Services N
Technology Hardware N
Semicon & Semicon Equip UW
Communication Services 4.5% 5.0% 0.5% OW
Telecommunication Services OW
Media N
Utilities 4.4% 6.0% 1.6% OW
100.0% 100.0% 0.0% Balanced

Source: MSCI, Datastream, J.P. Morgan.

Table 24: J.P. Morgan Equity Strategy — Global Regional Allocation

MSCI Weight Allocation Deviation Recommendation
EM 10.0% 10.0% 0.0% Neutral
DM 90.0% 90.0% 0.0% Neutral
US 70.9% 68.0% -2.9% Neutral
Japan 6.2% 8.0% 1.8% Overweight
Eurozone 8.6% 8.0% -0.6% Neutral
UK 3.8% 6.0% 2.2% Overweight
Others* 10.5% 10.0% -0.5% Neutral
100.0% 100.0% 0.0% Balanced

Source: MSCI, J.P. Morgan *Other includes Denmark, Switzerland, Australia, Canada, Hong Kong SAR, Sweden, Singapore, New Zealand, Israel and Norway

Table 25: J.P. Morgan Equity Strategy — European Regional Allocation

MSCI Weight Allocation Deviation Recommendation
Eurozone 51.0% 48.0% -3.0% Neutral
United Kingdom 22.6% 25.0% 2.4% Overweight
Others** 26.5% 27.0% 0.5% Overweight
100.0% 100.0% Balanced

Source: MSCI, J.P. Morgan **Other includes Denmark, Switzerland, Sweden and Norway

Table 26: J.P. Morgan Equity Strategy — Asset Class Allocation

Benchmark weighting Allocation Deviation Recommendation
Equities 60% 55% -5% Underweight
Bonds 30% 35% 5% Overweight
Cash 10% 10% 0% Neutral
100% 100% 0% Balanced

Source: MSCI, J.P. Morgan

Anamil Kochar (anamil.kochar@jpmchase.com) of J.P. Morgan India Private Limited is a co-author of this report.

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Completed 22 Apr 2024 03:42 AM BSTDisseminated 22 Apr 2024 03:43 AM BST