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Equity Strategy : Three key drivers of to date resilient corporate profitability to turn weaker
February 25, 2024
Equity Strategy : Three key drivers of to date resilient corporate profitability to turn weaker
Equity Strategy : Three key drivers of to date resilient corporate profitability to turn weaker
This document is being provided for the exclusive use of blake@sandboxfp.com.
26 February 2024

Equity Strategy

Three key drivers of to date resilient corporate profitability to turn weaker

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.

Profit margins are elevated in the historical context, and have started to soften… they always move lower ahead of the next downturn…

…net interest component was strongly accretive to corporate bottom line over the past few years, with net interest expense collapsing, but this is likely as good as it gets…

…ULCs are set to move higher, as well… this shoud lead to a rollover in margin proxy - deflator minus ULCs

Source: FRED,J.P. Morgan.

  • Bulls are to a good extent basing their constructive market call on the premise that corporate profits are set to accelerate, supported by the bottoming out in activity indicators that is now in progress, such as PMIs and ISM. Indeed, a number of forecasters have in the past few weeks raised their index targets on the back of the more optimistic earnings outlook. However, the earnings reality might turn out to be the opposite as we move through the year.
  • In aggregate, and despite a few notable exceptions, corporate profit margins are elevated in a historical context, and appear to be peaking out - top chart. The historical pattern where profit margins always start to move lower ahead of the next economic downturn is clear. We see 3 sources of downside to profit margins and to earnings from here:
  • 1. Many corporates benefitted from the unique feature of this cycle: as interest rates increased 300bp+, the net interest expense came down. That could be explained by companies locking in low cost of financing through extending the duration of their debt, and also through many corporates seeing an improving return on their cash balances. This, rather counter-intuitive, development is set to normalize as time passes. Companies will have to roll their debt into higher cost of credit. Separately, the basket of stocks with high refinancing needs is losing 20% vs SXXP over a year ago - JPDEHFCL, and our basket of cash rich companies is ahead by 14% - JPDEHFCW. We think this outperformance will continue through 1H.
  • 2. Topline was exceptionally strong post COVID for many corporates, as pricing power was high, companies were able to pass on input cost pressure with ease. As nominal GDP growth rates fade, and as PPIs have turned negative, margins could weaken. We are still of the view that COVID induced inflation spike will end up fully unwound, as per our Oct ’22 report, and this in turn suggests that corporate profitability winners need to reset. Historically, the positive correlation between earnings and PPIs has been clear.
  • 3. US economic activity was much more robust last year than most assumed, and this has potentially boosted productivity and in turn reduced ULCs. If the economy slows, partly because the supports that it enjoyed last year do not repeat, such as fiscal stimulus, ULCs could pick up. Profit margin proxy, corporate deflator minus ULCs, could turn into more of a headwind.
  • Putting the above 3 together, one might end up with a disappointing profits outcome even without seeing an outright recession, and we note that 2024 EPS projections keep coming down in key regions. Now, could S&P500 earnings do much better than economy wide profits? It is interesting to note that for S&P500 all the profit growth in the past few quarters was due to Magnificent 7, and this is one of the reasons why we remain OW Growth vs Value.  Ex these stocks, EPS growth for the remaining S&P500 constituents is outright negative. USD plays a role here, and if it gets stronger, as we suspect, then the S&P500 earnings might not outperform NIPA much.

Three key drivers of to date resilient corporate profitability to turn weaker

Figure 1: S&P500 EPS vs Trend

Source: Datastream, IBES

Consensus projections are for S&P500 EPS growth to accelerate in 2024 and 2025, to 10-11% pace, from 2% seen in 2023. Bulls are basing their constructive market call on this, but the question is whether earnings and margins will continue to grow from what is an already elevated starting point?

Profit margins are elevated, and starting to show some softening of late...

Figure 2: NIPA profit margins

Source: BEA

US profit margins are close to historical highs, and are softening from the peak levels. We note that the rollover in margins always historically preceded the next downturn.

Figure 3: MSCI Europe (ex Financials) EBIT margin

Source: Datastream

European profit margins are also at elevated levels, in the historical context. Some sectors such as commodities and Chemicals are subdued, but most other sectors are at highs, leaving the overall margin level elevated.

Table 1: MSCI World EBIT Margin and Earnings growth - consensus

EBIT Margin Earnings growth
23e 24e 25e Change 24e-23e (bps) 23e 24e 25e
World 14.5% 14.9% 15.7% 40.2 1.0% 7.6% 12.1%

Source: Datastream, IBES, *EBIT margin is for ex Financials and Real Estate

The consensus is projecting an acceleration in EPS growth and in margins this year, but we see risks to this.

...we believe profitability trends will be weaker over the next year: 1) Corporate profit margins have benefitted from lower interest expense. but that could start to reverse

Figure 4: Euro IG and HY Yield

Source: J.P. Morgan

Compared to pre-pandemic levels , the yield on the Euro denominated investment grade credit has gone up more than 300bp, from 0.9% in 2019 to 4.2% on average in 2023. Cost of borrowing for high yielders has risen by 380bp over the same time frame.

Figure 5: US HG and HY Yield

Source: J.P. Morgan

US corporate debt has seen yields rising by similar magnitude.

Figure 6: US and Eurozone Median Net Debt to Equity

Source: Datastream

At the same time, net leverage of both the US and European corporates has not changed all that much, to be close to the historical averages.

Figure 7: Nonfinancial corporate business: Net Interest Expenses

Source: FRED

What is interesting is that despite the big increase in borrowing costs it appears that companies are on average paying less in interest now than before the pandemic. Data from the St. Louis Fed tracking aggregate interest expense for non-financial corporates in the US shows a sharp decline over the past few years.

Figure 8: S&P500 and Stoxx600 Net interest expense as a % of Net Debt

Source: Bloomberg Finance L.P.

Our bottom up analysis on S&P500 shows that almost 40% of the index constituents have either seen their net interest expense go down, or the income on their cash balances improve compared to 2019. For Stoxx600, more than half the companies are paying less in interest expense versus 2019, or are earning more interest on their cash balances.

We also looked at the effective interest rate (net interest expense / net debt) that companies were paying on their debt. Here again we note that 42% of companies in the S&P500 (excluding net cash companies from the denominator) and 36% of companies in the Stoxx600 are paying a lower rate of interest on their debt versus the pre-pandemic levels. This finding is supported by work from our Credit strategists who concluded that, at an aggregate level, as a rate of change vs 2019, companies were net earnings more interest on their cash balances compared to what they were paying in additional coupons on their debt.

The reasons why this happened range from: a large number of corporates tapped debt markets during the period of extremely low interest rates, extending the duration of debt on their books, and locking in low cost of financing, which didn’t need to roll over yet, and at the same time on their cash balances companies started to earn some positive rate of return. We do not think that can last, the positive effect is as good as it gets, in our view.

Figure 9: European and US High Yield bonds maturity profile (EUR billion)

Source: J.P. Morgan Credit Strategy

Limited refinancing needs thus far meant that, at an aggregate level, companies were largely shielded from the higher borrowing costs. This is starting to change. We note that a growing volume of debt is to be refinanced over the next few years. At the same time, we expect central banks will commence rate cuts this year, which will reduce the income on cash that corporates are earning.

Table 2: Debt Distribution - Stoxx600

Debt Distribution Average Years to Maturity % Debt maturing this year % Debt maturing in next 3 years #cos whose more than 60% of total debt is maturing this year #cos whose more than 60% of total debt is maturing in next 3 years #cos whose more than 40% of total debt is maturing this year #cos whose more than 40% of total debt is maturing in next 3 years
ENERGY 6.0 3.6% 26.7% 4 8 4 13
FINANCIALS 5.0 7.5% 36.1% 16 56 23 83
REAL ESTATE 4.8 4.3% 33.5% 5 14 8 26
MATERIALS 3.9 5.3% 35.7% 7 25 16 48
INDUSTRIALS 3.9 6.4% 37.0% 33 74 48 106
COMMUNICATION SERVICES 5.3 4.6% 30.2% 7 16 10 24
CONSUMER STAPLES 4.7 8.0% 33.3% 13 24 17 42
CONSUMER DISCRETIONARY 3.5 0.9% 46.1% 27 52 33 60
UTILITIES 6.7 4.8% 24.0% 1 7 2 19
HEALTH CARE 4.5 0.0% 30.6% 12 25 15 38
INFORMATION TECHNOLOGY 3.7 10.0% 42.1% 12 21 17 25

Source: Bloomberg Finance L.P.

In Europe, quite a few companies in the Technology, Industrials and Consumer Discretionary sectors need to refinance a significant proportion of their debt over the next year.

Table 3: Debt Distribution - S&P500

Debt Distribution Average Years to Maturity % Debt maturing this year % Debt maturing in next 3 years #cos whose more than 60% of total debt is maturing this year #cos whose more than 60% of total debt is maturing in next 3 years #cos whose more than 40% of total debt is maturing this year #cos whose more than 40% of total debt is maturing in next 3 years
ENERGY 11.0 4.1% 20.8% 0 3 1 12
FINANCIALS 7.5 4.5% 24.5% 4 17 5 43
REAL ESTATE 6.6 3.6% 24.9% 0 2 0 20
MATERIALS 10.5 3.3% 25.6% 0 1 0 16
INDUSTRIALS 7.5 0.1% 23.9% 10 21 16 51
COMMUNICATION SERVICES 11.9 2.7% 15.1% 0 1 0 8
CONSUMER STAPLES 9.8 6.7% 24.6% 1 4 2 24
CONSUMER DISCRETIONARY 5.4 0.0% 25.6% 6 16 7 40
UTILITIES 13.3 4.1% 15.4% 0 1 1 7
HEALTH CARE 7.2 3.7% 21.1% 10 17 11 39
INFORMATION TECHNOLOGY 5.7 2.4% 26.6% 13 26 18 46

Source: Bloomberg Finance L.P.

The Consumer Discretionary, Technology and Real Estate sectors in the US have relatively high proportion of shorter duration debt.

Figure 10: Nonfinancial corporate business: Net Interest Expense versus US 10Y bond yield

Source: Bloomberg Finance L.P., FRED

This suggests that the startling divergence that was seen between the rising interest rates and falling net interest expense seen over the past 3 years is set to start closing.

Our analysts have flagged stocks like Safran, BAE systems, Sanofi, GSK and Novartis among those that have benefitted from this.

The basket of stocks with high refinancing needs will likely keep struggling...

In our 2024 outlook report, we had introduced a couple of stock baskets centered around this theme.

Table 4: JPM European losers of higher financing costs - JPDEHFCL Index

Name Ticker Sector ND/EBITDA 2024e
Ocado Group PLC OCDO LN Staples 9.5
United Utilities Group PLC UU/ LN Utilities 8.8
Severn Trent PLC SVT LN Utilities 7.4
National Grid PLC NG/ LN Utilities 6.5
Cellnex Telecom SA CLNX SM Comm. Srvcs 6.2
Snam SpA SRG IM Utilities 6.1
Enagas SA ENG SM Utilities 5.1
Infrastrutture Wireless Italia INW IM Comm. Srvcs 4.6
Grifols SA GRF SM Health care 4.4
Redeia Corp SA RED SM Utilities 4.0
LANXESS AG LXS GR Materials 4.0
Fresenius SE & Co KGaA FRE GR Health care 3.6
Wizz Air Holdings Plc WIZZ LN Industrials 3.0
Fresenius Medical Care AG & Co FME GR Health care 2.9
Bayer AG BAYN GR Health care 2.8
Fluidra SA FDR SM Industrials 2.8
Nexi SpA NEXI IM Financials 2.8
Diageo PLC DGE LN Staples 2.7
Pernod Ricard SA RI FP Staples 2.7
Anheuser-Busch InBev SA/NV ABI BB Staples 2.7
Coca-Cola HBC AG CCH LN Staples 2.7
Akzo Nobel NV AKZA NA Materials 2.5
BASF SE BAS GR Materials 2.5
Givaudan SA GIVN SW Materials 2.5
British American Tobacco PLC BATS LN Staples 2.4
Electrolux AB ELUXB SS Discretionary 2.4
Alstom SA ALO FP Industrials 2.3
ams-OSRAM AG AMS SW IT 2.2
Ashtead Group PLC AHT LN Industrials 2.2
Koninklijke Philips NV PHIA NA Health care 2.0
Eurofins Scientific SE ERF FP Health care 2.0
Symrise AG SY1 GR Materials 1.7
RELX PLC REL LN Industrials 1.6
DSV A/S DSV DC Industrials 1.4
Valeo SE FR FP Discretionary 1.2

Source: J.P. Morgan

On the negative side, we identified companies that have high leverage and face meaningful refinancing risk in the near-term.

…while cash rich companies should keep working in the near term

Table 5: JPM European Beneficiaries of higher rates - JPDEHFCW Index

Name Ticker Sector
Publicis Groupe SA PUB FP Comm. Srvcs
Renault SA RNO FP Discretionary
Mercedes-Benz Group AG MBG GR Discretionary
Stellantis NV STLAM IM Discretionary
Industria de Diseno Textil SA ITX SM Discretionary
Whitbread PLC WTB LN Discretionary
Volkswagen AG VOW GR Discretionary
Beiersdorf AG BEI GR Staples
KONE AG KNEBV FH Financials
Banco BPM SpA BAMI IM Financials
Banco Bilbao Vizcaya Argentari BBVA SM Financials
Bank of Ireland Group PLC BIRG ID Financials
Bankinter SA BKT SM Financials
CaixaBank SA CABK SM Financials
Intesa Sanpaolo SpA ISP IM Financials
UniCredit SpA UCG IM Financials
AIB Group PLC AIBG ID Financials
Banco de Sabadell SA SAB SM Financials
Schindler Holding AG SCHP SW Industrials
Epiroc AB EPIA SS Industrials
Airbus SE AIR FP Industrials
Dassault Aviation SA AM FP Industrials
Ryanair Holdings PLC RYA ID Industrials
Spectris PLC SXS LN IT
Dassault Systemes SE DSY FP IT
SAP SE SAP GR IT
Centrica PLC CNA LN Utilities

Source: J.P. Morgan

On the other hand, we argued that companies that are cash rich, or benefit from still high interest rates, will be well positioned.

Figure 11: JPM Beneficiaries of higher rates basket relative

Source: Bloomberg Finance L.P.

This losers basket has lagged the Stoxx600 index by almost 20% over the last year, while beneficiaries basket is outperforming the Stoxx600 index by 14% since the start of last year. We believe this trend should continue, at least in the 1H of this year.

2) Corporate topline was very strong post COVID, with high pricing power, but these are not sustainable

Figure 12: USD GDP Deflator

Source: J.P. Morgan

Corporates benefitted from the very strong topline growth post COVID. Many had like-for-like sales growth of a magnitude never seen before. This was helped by strong consumer backdrop, supported by ample liquidity.

Figure 13: US Manufacturing PMI - Supplier Delivery Times

Source: J.P. Morgan

At the same time, the supply chain distortions created by COVID-related shutdowns created huge supply-demand imbalances. While this at face value increased costs and resulted in production outages in a wide range of industries, companies were able to more than offset any negative impact on their bottom-line through aggressive pricing.

Figure 14: US Retail trade - Motor Vehicle Inventory/sales

Source: J.P. Morgan

We believe that this period of very strong pricing power is ending. Inventory levels across a number of industries are normalising, as are sales.

Figure 15: MSCI World12m trailing EPS and Global PPI

Source: Datastream, J.P. Morgan

As PPIs turn negative, corporate earnings will likely follow.

Figure 16: MSCI Eurozone 12m trailing EPS and Euro area PPI

Source: Bloomberg Finance L.P., Datastream

Producer prices have seen bigger declines in the Euro Area, and the positive fit is as good.

3) ULCs could pick up as topline slows, and as wage costs are sticky

Figure 17: Unemployment rate and avg hourly earnings

Source: FRED

The strong improvement in productivity was a big factor behind the resilience in margins over the past year, but that could have been flattered by elevated topline growth, which was supported by one-off factors such as excess liquidity and the aggressive government spending. Even though the labour market was extremely tight and delivered higher wages, the strong output has kept unit labour costs in check.

Figure 18: Euro area negotiated pay growth

Source: J.P. Morgan

US wage growth has peaked, but could stay elevated for a while. Eurozone wage growth also appears to be peaking, but at elevated levels.

Figure 19: GDP Deflator minus ULCs - US

Source: J.P. Morgan, FRED

Looking forward, wages will likely remain sticky around current elevated levels, and productivity might slow, as topline slows. Our margin proxy (GDP deflator minus ULCs) has peaked and we believe it will continue to weaken further.

Earnings projections are continuing to be revised lower...

Figure 20: Weekly EPS revisions for key regions

Source: IBES

EPS revisions remain negative for all major markets, Japan being the notable exception, where we keep our key OW.

Figure 21: MSCI Europe sectors 2024 EPS - change ytd

Source: IBES

Except Retail, every European sector has seen cuts to its 2024 earnings projections in the last couple of months.

Figure 22: MSCI US sectors 2024 EPS change ytd

Source: IBES

Even in the US, which has delivered stronger EPS growth, most sectors have seen downgrades to 2024 earnings projections.

...all the EPS growth is still narrowly concentrated in the Magnificent 7...

Table 6: Q4 Earnings summary

Q4 Earnings Summary
S&P500 Stoxx600
% companies reported 82% 55%
% companies beating EPS 77% 52%
EPS %y/y 7% -11%
% companies beating Sales 57% 37%
Sales %y/y 4% -7%

Source: J.P. Morgan, Bloomberg Finance L.P.

On the surface, S&P500 earnings delivery of 7% y/y in Q4 appears healthy.

Figure 23: S&P500 sector contribution to 4Q’23 earnings growth

Source: Bloomberg Finance L.P., J.P. Morgan

However, we note that ex the magnificent 7 (Apple, Microsoft, Amazon, Nvidia, Meta, Tesla and Alphabet), US earnings growth is actually negative at -4% y/y.

Table 7: Magnificent 7, SPX and SPX ex Mag 7 earnings growth

23e Net income growth
APPLE -2.8%
AMAZON.COM -
MICROSOFT 5.6%
NVIDIA -25.7%
ALPHABET A 21.9%
TESLA -24.2%
META PLATFORMS A 61.1%
Magnificent 7 18.2%
S&P ex Magnificent 7 -4.1%
S&P500 -1.0%

Source: Datastream

For the whole last year, Magnificent 7 earnings grew strongly, and the remaining 493 stocks recorded negative EPS growth.

Figure 24: Magnificent 7 and S&P500 performance

Source: Datastream

The divergence in earnings for the Magnificent 7 stocks and the rest of the market largely explains the wide divergence in relative performance over the last year.

...we maintain OW Growth vs Value stye...

Figure 25: MSCI World Growth vs Value 12m Fwd. EPS

Source: Datastream

Similarly, we note that Growth stocks have been delivering much better earnings compared to Value.

Figure 26: MSCI US and Europe Growth vs Value

Source: Datastream

This is behind our continued preference for Growth over Value style that we held through 2023, and are continuing this year.

...S&P500 earnings are more international than NIPA profits… if USD strengthens, S&P500 earnings might not be able to outperform NIPA

Figure 27: USD net positioning

Source: J.P. Morgan

The question is could S&P500 earnings perform better than NIPA profits. Perhaps not if USD strengthens, as S&P500 earnings are typically more international than NIPA profits. We note that USD positioning is not very stretched at present, and the interest rate differential could work in support of USD as we move through this year.

Equity Strategy Key Calls and Drivers

So far this year, US is ahead of International, Growth is outperforming Value, large caps are again beating small, and China continued struggling. We believe that this, ultimately unhealthy, high concentration and narrow leadership is set to continue until something breaks. To buy Value, beta and International stocks, one needs to see a reflationary backdrop, in our view, but we could have the exact opposite. The risk is of a disappointment on both sides of the Goldilocks narrative. Fed cuts might still be overdiscounted, despite the recent hawkish repricing, and the chances are that inflation picks up again, supply side driven, rather than due to stronger activity, freight rates have nearly tripled. We believe our long duration call made in October will have legs in 2024, but have argued at the start of this year that yields will likely consolidate near term, and the USD could be bottoming out. Regionally, we have preferred US to International stocks since May of last year, and don’t see that changing yet. We remain cautious on China, keep fading the bounces, and keep OW Japan – it remains our top regional pick. We are OW Growth vs Value, continuing our call from 2023, and continue to be UW Banks call started in Q4 of last year, after three years of Banks beating the market.

Table 8: 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 51.8
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 13.5x 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 12: 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 13: 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. However, if markets weaken in the first half, US could fare relatively better vs Eurozone
    Japan Overweight Japan is attractively priced; diverging policy path and TSE reforms are tailwinds
    Eurozone Underweight Growth-Policy trade-off likely to deteriorate further; Eurozone is typically a high beta on the way down
    UK Overweight Valuations still look very attractive, low beta with the highest regional dividend yield

Source: J.P. Morgan estimates.

Top Picks

Table 14: J.P. Morgan European Strategy: Top European picks

Market Cap EPS Growth Dividend Yield 12m Fwd P/E Performance
Name Ticker Sector Rating Price Currency (€ Bn) 23e 24e 25e 24e Current 10Y Median % Premium -3m -12m
ENI ENI IM Energy OW 14 E 48.0 -35% -8% 2% 6.5% 6.3 12.7 -51% -3% 1%
TOTALENERGIES TTE FP Energy OW 59 E 141.1 -33% -4% 4% 5.3% 7.0 10.6 -34% -4% 1%
SHELL SHEL LN Energy OW 30 E 189.6 -23% 0% 5% 4.0% 7.7 11.2 -32% 0% 6%
NOVOZYMES B NZYMB DC Materials OW 386 DK 24.2 -18% 17% 10% 1.1% 29.8 29.2 2% 7% 10%
CRH PUBLIC LIMITED CRH LN Materials OW 78 U$ 49.7 -11% 10% 9% 1.8% 15.5 15.1 3% 28% 69%
RIO TINTO RIO LN Materials OW 5170 £ 103.7 -11% 10% -9% 6.7% 8.4 10.3 -19% -6% -14%
NORSK HYDRO NHY NO Materials OW 57 NK 10.2 -60% 21% 36% 4.4% 10.4 12.9 -20% -10% -27%
ANGLO AMERICAN AAL LN Materials OW 1770 £ 25.4 -52% -5% 5% 4.1% 10.0 9.5 4% -21% -43%
SCHNEIDER ELECTRIC SU FP Industrials OW 208 E 118.9 2% 15% 11% 1.7% 24.4 16.4 48% 26% 35%
ASHTEAD GROUP AHT LN Industrials OW 5524 £ 28.3 26% 3% 14% 1.4% 15.8 14.1 12% 17% 2%
RYANAIR HOLDINGS RYA ID Industrials OW 20 E 23.0 - 31% 35% 0.0% 9.4 13.1 -29% 16% 40%
AIRBUS AIR FP Industrials OW 147 E 116.4 10% 3% 25% 1.7% 21.6 18.4 18% 10% 20%
MTU AERO ENGINES HLDG. MTX GR Industrials OW 215 E 11.6 24% 11% 13% 2.1% 17.4 18.1 -4% 14% -7%
STELLANTIS STLAM IM Discretionary OW 24 E 76.8 12% -7% 1% 6.4% 4.4 4.8 -10% 31% 49%
BMW BMW GR Discretionary OW 105 E 66.6 -34% -10% 2% 5.3% 6.4 7.7 -17% 11% -
INDITEX ITX SM Discretionary OW 41 E 127.9 27% 30% 9% 3.6% 21.7 24.3 -11% 11% 44%
ADIDAS ADS GR Discretionary OW 187 E 33.7 -110% - 128% 0.7% 52.1 24.6 112% 0% 33%
RICHEMONT N CFR SW Discretionary OW 136 SF 84.2 78% -2% 11% 1.8% 20.1 20.4 -2% 19% -6%
COMPASS GROUP CPG LN Discretionary OW 2203 £ 44.0 50% 13% 12% 1.9% 22.2 20.8 7% 6% 13%
COLRUYT GROUP COLR BB Staples OW 40 E 5.1 -27% 61% 7% 2.0% 15.1 17.6 -14% 3% 56%
ANHEUSER-BUSCH INBEV ABI BB Staples OW 58 E 118.1 -7% 15% 14% 2.1% 18.0 19.5 -8% 1% 3%
NOVO NORDISK 'B' NOVOB DC Health Care OW 853 DK 516.2 52% 23% 21% 1.1% 36.1 22.7 59% 22% 71%
ASTRAZENECA AZN LN Health Care OW 10036 £ 182.0 9% 13% 11% 2.3% 15.2 17.8 -14% -1% -13%
SMITH & NEPHEW SN/ LN Health Care OW 1138 £ 11.6 12% 12% 8% 2.8% 13.7 18.4 -26% 10% -7%
UBS GROUP UBSG SW Financials OW 25 SF 89.4 -99% 3670% 99% 2.5% 21.1 10.4 104% 6% 23%
NATWEST GROUP NWG LN Financials OW 228 £ 23.3 38% -27% 12% 7.4% 5.9 10.4 -43% 12% -20%
ING GROEP INGA NA Financials OW 13 E 44.3 106% -12% 11% 8.7% 6.7 9.1 -27% 0% -1%
INTESA SANPAOLO ISP IM Financials OW 3 E 53.0 79% 15% 1% 10.2% 6.4 10.2 -37% 14% 17%
LONDON STOCK EXCHANGE GROUP LSEG LN Financials OW 8844 £ 56.0 3% 10% 14% 1.4% 23.8 22.7 5% 0% 18%
AMUNDI (WI) AMUN FP Financials OW 62 E 12.6 4% 4% 7% 6.7% 9.7 12.7 -23% 11% 1%
DASSAULT SYSTEMES DSY FP IT OW 43 E 57.9 6% 7% 11% 0.6% 33.0 31.5 5% 1% 15%
ASML HOLDING ASML NA IT OW 877 E 350.4 41% -6% 51% 0.7% 43.1 26.5 63% 38% 48%
ASM INTERNATIONAL ASM NA IT OW 558 E 27.6 -3% 8% 29% 0.6% 39.7 16.2 146% 22% 78%
DEUTSCHE TELEKOM DTE GR Telecoms OW 22 E 111.5 -10% 10% 13% 3.8% 12.1 14.3 -15% 3% 6%
BT GROUP BT/A LN Telecoms OW 107 £ 12.5 9% -11% -1% 7.2% 5.7 8.9 -35% -12% -24%
RELX REL LN Industrials OW 3475 £ 76.5 12% 8% 9% 1.7% 27.9 19.3 45% 14% 36%
HELLOFRESH HFG GR Staples OW 12 E 2.1 -47% 60% 46% 0.0% 10.8 19.6 -45% -16% -43%
RWE RWE GR Utilities OW 31 E 23.1 24% -51% -18% 3.5% 11.2 13.0 -14% -18% -23%
ENEL ENEL IM Utilities OW 6 E 60.3 23% 4% 1% 7.7% 8.8 12.0 -27% -7% 13%
SEGRO SGRO LN Real Estate OW 871 £ 12.5 6% 7% 7% 3.2% 24.7 25.3 -2% 6% 5%

Source: Datastream, MSCI, IBES, J.P. Morgan, Prices and Valuations as of COB 22nd Feb, 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 15: DM Equity Fund Flows Summary

Regional equity fund flows
$mn % AUM
1w 1m 3m ytd 12m 1w 1m 3m ytd 12m
Europe ex UK -170 -626 -421 -1,130 -13,385 0.0% 0.2% -0.1% 0.2% 0.6%
UK -204 -1,291 -5,453 -1,706 -27,686 -0.1% -0.2% -0.1% -0.3% -4.3%
US -15,608 -5,327 85,647 -10,252 98,959 -0.1% -0.5% -2.2% -0.6% -9.8%
Japan 1,066 4,555 -3,691 4,236 11,862 -0.2% -0.1% 1.0% -0.1% 1.2%

Source: EPFR, as of 7th Feb, 2024

Technical Indicators

Performance

Table 16: Sector Index Performances — MSCI Europe

Source: MSCI, Datastream, as at COB 22nd Feb, 2024.

Table 17: Country and Region Index Performances

(%change) Local Currency US$
Country Index 4week 12m YTD 4week 12m YTD
Austria ATX (0.7) (1.3) (0.6) (0.9) 0.4 (2.8)
Belgium BEL 20 1.8 (5.0) (0.3) 1.6 (3.3) (2.4)
Denmark KFX 11.3 34.7 13.9 11.1 36.9 11.4
Finland HEX 20 (2.6) (12.0) (2.0) (2.8) (10.5) (4.1)
France CAC 40 6.0 8.4 4.9 5.8 10.2 2.6
Germany DAX 2.7 12.8 3.7 2.6 14.7 1.5
Greece ASE General 4.9 28.9 9.8 4.7 31.1 7.4
Ireland ISEQ 5.9 17.2 9.2 5.7 19.2 6.8
Italy FTSE MIB 7.3 19.4 6.6 7.1 21.4 4.3
Japan Topix 5.1 34.7 12.4 3.0 20.5 5.3
Netherlands AEX 5.2 13.3 9.0 5.0 15.3 6.7
Norway OBX (1.0) (0.8) (2.8) (1.4) (2.6) (6.1)
Portugal BVL GEN (4.4) (6.0) (10.0) (4.6) (4.4) (12.0)
Spain IBEX 35 2.2 10.5 0.4 2.1 12.4 (1.8)
Sweden OMX 2.7 9.1 1.3 3.8 9.8 (1.3)
Switzerland SMI 1.6 0.8 2.2 (0.0) 6.2 (2.4)
United States S&P 500 3.9 27.5 6.7 3.9 27.5 6.7
United States NASDAQ 3.4 39.4 6.9 3.4 39.4 6.9
United Kingdom FTSE 100 2.1 (3.1) (0.6) 1.4 1.4 (1.6)
EMU MSCI EMU 4.3 9.5 5.2 4.1 11.4 3.0
Europe MSCI Europe 3.7 6.0 3.6 3.3 8.9 1.2
Global MSCI AC World 3.9 22.3 6.1 3.7 21.9 5.1

Source: MSCI, Datastream, as at COB 22nd Feb, 2024.

Earnings

Table 18: IBES Consensus EPS Sector Forecasts — MSCI Europe

EPS Growth (%yoy)
2023 2024E 2025E 2026E
Europe (3.4) 3.7 9.7 9.3
Energy (32.1) (3.3) 3.3 12.2
Materials (38.1) 7.3 10.1 9.1
Chemicals (34.7) 18.0 17.8 12.8
Construction Materials 10.9 6.2 8.9 0.1
Metals & Mining (46.6) 0.1 2.0 9.8
Industrials (1.0) 8.1 13.5 11.2
Capital Goods 21.0 12.4 13.4 11.2
Transport (56.1) (20.7) 18.5 11.9
Business Svs 4.5 8.2 10.7 10.8
Discretionary 7.1 2.4 10.2 9.4
Automobile 1.2 (3.5) 5.1 6.4
Consumer Durables (5.3) 5.9 14.0 13.0
Media (2.1) 10.3 9.3 10.1
Retailing 52.0 14.4 17.1 4.8
Hotels,Restaurants&Leisure 90.2 17.8 20.4 19.5
Staples 2.6 3.8 8.5 7.9
Food & Drug Retailing 3.1 6.2 12.0 7.4
Food Beverage & Tobacco 2.0 2.8 8.2 8.2
Household Products 4.2 5.8 8.1 7.4
Healthcare 2.6 5.9 14.0 11.0
Financials 15.5 6.2 7.7 7.3
Banks 29.0 0.9 4.4 4.6
Diversified Financials (22.3) 20.5 22.2 23.1
Insurance 12.0 12.8 7.8 4.7
Real Estate 12.2 (4.2) 4.5 3.3
IT 22.2 (10.8) 27.8 15.3
Software and Services 46.2 (18.6) 20.5 12.9
Technology Hardware (20.8) 11.5 8.2 9.4
Semicon & Semicon Equip 28.1 (12.0) 40.2 18.5
Telecoms (10.5) 14.3 10.1 8.2
Utilities 3.0 (2.5) 1.2 1.7

Source: IBES, MSCI, Datastream. As at COB 22nd Feb, 2024.

Table 19: IBES Consensus EPS Country Forecasts

EPS growth (%change)
Country Index 2023 2024E 2025E 2026E
Austria ATX (14.7) (6.0) 3.7 (2.2)
Belgium BEL 20 15.7 2.9 11.1 13.1
Denmark Denmark KFX (14.8) 26.1 20.8 16.3
Finland MSCI Finland (25.1) 5.9 10.9 9.2
France CAC 40 (1.9) 2.3 8.6 9.4
Germany DAX 3.6 (0.5) 11.7 9.5
Greece MSCI Greece 8.4 (2.5) 5.3 22.0
Ireland MSCI Ireland 35.3 (3.2) 1.7 8.9
Italy MSCI Italy 9.8 (0.4) 2.0 4.3
Netherlands AEX (1.9) 0.8 13.2 11.0
Norway MSCI Norway (40.0) 4.9 5.2 2.2
Portugal MSCI Portugal 33.4 3.4 6.0 7.9
Spain IBEX 35 6.2 2.2 4.5 5.4
Sweden OMX 31.9 0.5 8.1 7.1
Switzerland SMI (3.2) 9.4 13.2 9.5
United Kingdom FTSE 100 (12.1) 3.1 7.7 10.1
EMU MSCI EMU 4.3 2.8 9.8 8.5
Europe ex UK MSCI Europe ex UK 0.9 4.0 10.6 8.9
Europe MSCI Europe (3.4) 3.7 9.7 9.3
United States S&P 500 2.2 9.6 13.5 11.5
Japan Topix 3.0 14.4 8.5 8.9
Emerging Market MSCI EM (4.0) 16.2 15.3 12.2
Global MSCI AC World 0.3 8.8 12.6 10.8

Source: IBES, MSCI, Datastream. As at COB 22nd Feb, 2024** Japan refers to the period from March in the year stated to March in the following year – EPS post-goodwill

Valuations

Table 20: 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 13.8 12.5 11.5 3.5% 3.7% 4.6% 7.9 7.3 6.9 1.9 1.8 1.7
Energy 7.2 7.0 6.3 5.7% 5.7% 5.8% 3.2 3.2 3.1 1.1 1.0 1.0
Materials 14.7 13.4 12.3 3.4% 3.7% 3.9% 7.2 6.5 5.9 1.6 1.5 1.4
Chemicals 22.7 19.3 17.1 2.8% 3.0% 3.2% 11.1 10.0 9.1 2.3 2.2 2.1
Construction Materials 13.2 12.1 12.1 3.0% 3.1% 3.2% 6.8 6.3 4.3 1.5 1.4 0.8
Metals & Mining 9.1 8.9 8.1 4.6% 4.9% 5.3% 4.5 4.1 3.6 1.1 1.0 1.0
Industrials 19.3 17.0 15.3 2.4% 2.6% 7.9% 9.8 8.9 8.0 3.2 3.0 2.8
Capital Goods 19.0 16.8 15.1 2.3% 2.6% 9.3% 10.1 9.0 8.1 3.3 3.1 2.9
Transport 17.8 15.0 13.1 3.2% 3.4% 3.4% 7.2 6.8 5.8 1.7 1.7 1.6
Business Svs 22.4 20.2 18.2 2.3% 2.5% 2.7% 13.0 11.8 10.8 6.2 5.6 4.9
Discretionary 13.8 12.5 11.4 2.7% 3.0% 3.1% 5.3 4.7 4.8 1.9 1.8 1.8
Automobile 6.4 6.1 5.8 5.0% 5.3% 5.3% 1.8 1.3 2.0 0.8 0.7 0.7
Consumer Durables 24.7 21.7 19.3 1.7% 2.0% 2.1% 13.8 12.5 11.4 4.4 4.0 3.6
Media & Entertainment 16.8 15.4 13.4 2.3% 2.5% 2.6% 11.6 9.6 8.6 1.9 1.8 4.0
Retailing 14.4 12.3 11.8 2.5% 2.8% 3.1% 9.8 8.7 7.1 2.7 2.6 2.1
Hotels,Restaurants&Leisure 23.8 19.7 16.5 2.1% 2.4% 2.8% 12.1 10.4 9.5 4.0 3.6 3.5
Staples 17.2 15.8 14.6 3.1% 3.3% 3.6% 10.8 10.1 9.4 2.9 2.7 2.6
Food & Drug Retailing 12.0 10.7 10.0 3.9% 4.3% 4.7% 6.1 5.7 5.8 1.6 1.5 1.3
Food Beverage & Tobacco 16.7 15.4 14.2 3.5% 3.7% 4.0% 10.7 10.0 9.0 2.6 2.5 2.3
Household Products 20.5 19.0 17.7 2.3% 2.5% 2.7% 14.0 13.0 12.5 4.2 3.9 3.9
Healthcare 17.5 15.3 13.8 2.5% 2.7% 2.8% 12.2 10.8 9.9 3.4 3.1 3.0
Financials 8.6 8.0 7.4 5.8% 6.0% 6.5% - - - 1.0 1.0 0.9
Banks 6.5 6.2 6.0 8.0% 8.0% 8.5% - - - 0.7 0.7 0.6
Diversified Financials 14.3 11.7 9.7 2.5% 2.8% 3.1% - - - 1.3 1.4 1.3
Insurance 10.5 9.7 9.2 5.5% 5.8% 6.1% - - - 1.6 1.5 1.4
Real Estate 14.0 13.4 12.9 4.4% 4.6% 4.9% - - - 0.8 0.8 0.8
IT 30.0 23.5 20.3 1.2% 1.3% 1.4% 17.7 14.1 12.1 5.1 4.6 4.0
Software and Services 30.2 25.1 22.2 1.3% 1.4% 1.5% 19.0 15.5 13.4 4.5 4.2 3.7
Technology Hardware 15.5 14.3 13.1 2.7% 2.7% 2.9% 8.8 8.0 6.8 1.9 1.7 1.6
Semicon & Semicon Equip 35.4 25.2 21.3 0.8% 1.0% 1.1% 20.8 15.4 13.1 8.4 7.1 5.9
Communication Services 14.2 12.9 11.7 4.3% 4.4% 4.6% 6.6 6.1 5.7 1.4 1.3 1.4
Utilities 11.8 11.7 11.5 5.4% 5.6% 5.6% 7.9 7.9 8.2 1.5 1.4 1.4

Source: IBES, MSCI, Datastream. As at COB 22nd Feb, 2024.

Table 21: 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 7.5 7.5 7.3 7.1 6.1%
Belgium BEL 20 15.4 15.7 14.1 12.3 3.1%
Denmark Denmark KFX 27.7 28.6 23.7 20.4 1.7%
Finland MSCI Finland 14.5 14.8 13.3 12.2 4.6%
France CAC 40 13.1 13.3 12.2 11.2 3.3%
Germany DAX 11.8 12.1 10.8 9.9 3.5%
Greece MSCI Greece 30.9 31.2 29.6 20.6 1.7%
Ireland MSCI Ireland 10.6 10.7 10.5 9.6 3.7%
Italy MSCI Italy 8.7 8.8 8.6 8.2 5.7%
Netherlands AEX 15.0 15.3 13.5 12.4 2.5%
Norway MSCI Norway 10.1 10.2 9.7 9.5 6.8%
Portugal MSCI Portugal 13.8 14.0 13.2 12.2 4.1%
Spain IBEX 35 10.5 10.6 10.2 9.6 5.1%
Sweden OMX 15.0 15.2 14.1 13.3 3.8%
Switzerland SMI 16.9 17.3 15.3 13.9 3.4%
United Kingdom FTSE 100 10.8 11.0 10.2 9.2 4.3%
EMU MSCI EMU 13.0 13.2 12.0 11.1 3.5%
Europe ex UK MSCI Europe ex UK 14.5 14.8 13.4 12.3 3.3%
Europe MSCI Europe 13.5 13.8 12.5 11.5 3.6%
United States S&P 500 20.7 21.4 18.8 16.8 1.5%
Japan Topix 15.0 16.2 14.9 13.7 2.3%
Emerging Market MSCI EM 11.6 11.9 10.6 9.3 3.1%
Global MSCI AC World 17.1 17.5 16.0 14.3 2.1%

Source: IBES, MSCI, Datastream. As at COB 22nd Feb, 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 22: 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 3Q23 1Q24E 3Q24E 1Q25E
United States 2.5 2.0 1.5 4.9 3.3 1.7 0.5 0.5 0.7 3.6 3.0 2.8 2.5
Eurozone 0.5 0.4 1.0 -0.5 0.2 0.5 0.7 0.7 0.7 5.0 2.6 2.1 1.9
United Kingdom 0.1 0.0 0.1 -0.5 -1.4 1.0 0.8 0.0 -0.5 6.7 3.6 1.7 2.3
Japan 1.9 0.5 0.7 -3.3 -0.4 1.3 1.6 0.7 0.7 3.1 2.6 2.3 2.1
Emerging markets 4.1 3.8 3.6 5.7 3.6 4.0 3.6 3.7 3.6 3.8 3.8 3.5 3.5
Global 2.7 2.3 2.2 3.5 2.5 2.4 1.9 1.9 2.0 4.0 3.3 2.9 2.8

Source: J.P. Morgan economic research J.P. Morgan estimates, as of COB 16th Feb, 2024

Table 23: Official Rates Outlook

Forecast for
Official interest rate Current Last change (bp) Forecast next change (bp) Mar 24 Jun 24 Sep 24 Dec 24
United States Federal funds rate 5.50 26 Jul 23 (+25bp) Jun 24 (-25bp) 5.50 5.25 4.75 4.25
Eurozone Depo rate 4.00 14 Sep 23 (+25bp) Jun 24 (-25bp) 4.00 3.75 3.50 3.00
United Kingdom Bank Rate 5.25 03 Aug 23 (+25bp) Aug 24 (-25bp) 5.25 5.25 5.00 4.50
Japan Pol rate IOER -0.10 Jan 16 (-20bp) 3Q24 (+10bp) -0.10 -0.10 0.00 0.00

Source: J.P. Morgan estimates, Datastream, as of COB 16th Feb, 2024

Table 24: 10-Year Government Bond Yield Forecasts

10 Yr Govt BY Forecast for end of
23-Feb-24 Mar 24 Jun 24 Sep 24 Dec 24
US 4.33 3.95 3.80 3.75 3.65
Euro Area 2.45 2.15 2.00 1.85 1.75
United Kingdom 4.11 3.80 3.65 3.55 3.45
Japan 0.72 0.60 0.65 0.80 0.80

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 9th Feb, 2024

Table 25: Exchange Rate Forecasts vs. US Dollar

Exchange rates vs US$ Forecast for end of
22-Feb-24 Mar 24 Jun 24 Sep 24 Dec 24
EUR 1.08 1.03 1.05 1.10 1.13
GBP 1.26 1.18 1.19 1.24 1.26
CHF 0.88 0.92 0.90 0.86 0.85
JPY 151 150 148 146 144
DXY 104.0 108.2 106.5 102.5 100.1

Source: J.P. Morgan estimates, Datastream, forecasts as of COB 9th Feb, 2024

Sector, Regional and Asset Class Allocations

Table 26: J.P. Morgan Equity Strategy — European Sector Allocation

MSCI Europe Weights Allocation Deviation Recommendation
Energy 6.1% 8.0% 1.9% OW
Materials 7.1% 6.0% -1.1% N
Chemicals UW
Construction Materials N
Metals & Mining N
Industrials 15.3% 14.0% -1.3% N
Capital Goods ex Aerospace & Defence UW
Aerospace & Defence OW
Transport N
Business Services N
Consumer Discretionary 9.4% 7.0% -2.4% UW
Automobile UW
Consumer Durables N
Consumer Srvcs UW
Speciality Retail UW
Internet Retail UW
Consumer Staples 11.9% 13.0% 1.1% OW
Food & Drug Retailing UW
Beverages OW
Food & Tobacco OW
Household Products OW
Healthcare 15.5% 18.0% 2.5% OW
Financials 17.9% 14.0% -3.9% UW
Banks UW
Insurance N
Real Estate 0.8% 2.0% 1.2% OW
Information Technology 7.2% 7.0% -0.2% 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 4.3% 6.0% 1.7% OW
100.0% 100.0% 0.0% Balanced

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

Table 27: J.P. Morgan Equity Strategy — Global Regional Allocation

MSCI Weight Allocation Deviation Recommendation
EM 10.6% 10.0% -0.6% Neutral
DM 89.4% 90.0% 0.6% Neutral
US 70.1% 68.0% -2.1% Neutral
Japan 6.1% 8.0% 1.9% Overweight
Eurozone 5.4% 6.0% 0.6% Underweight
UK 2.4% 6.0% 3.6% Overweight
Others* 16.0% 12.0% -4.0% Overweight
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 28: J.P. Morgan Equity Strategy — European Regional Allocation