After calling for summer stock market rally, JPMorgan says now is not the time for investors to play defense

This has been the subject of intense debate among portfolio managers and Wall Street market gurus: Is the incredible summer rally in US stocks about to run out of steam? Or are the gains just beginning?

For what it’s worth, a team of Europe-based equity analysts at JPMorgan Chase & Co. released a note to clients on Monday saying technology and other growth stocks are likely to continue to lead the market higher.

But the arguments behind their call may surprise some investors.

According to Mislav Matejka, head of European and global equity strategy at JPM, the scale of the Federal Reserve’s next interest rate hike – expected at the central bank’s next policy meeting in September – is not as important as the direction of the Treasury in the longer term. yields. So, instead of fixating on the size of the next Fed rate hike, investors should keep an eye on a steepening yield curve. Only then will value stocks regain the upper hand over growth, according to the JPM team.

“The key is the direction of long yields, where the mid-year peak was
one of the big catalysts for the growth style rebound,” Matejka wrote in the research note.

Growth stocks like Amazon.com Inc. AMZN,
-0.38%
have been the stars of the market rebound this summer, which has seen the shares of some of the most battered stocks return to a leading position in the market.

For the curve to start steepening again, the JPM team believes that the global economy will need to demonstrate that the slowdown in global economic growth is over. Overnight, investors faced more evidence of this trend in the form of more disappointing economic data out of China, which helped inspire surprise interest rate cuts by the country’s central bank. .

While the JPM team expects growth stocks to continue to outperform through the end of the year, they believe that ultimately value stocks will regain the leadership position.

But unlike the last episode of value stock leadership, which coincided with the sharp market selloff that marred the first half of 2022, it’s possible – even likely – that investors will see value stocks outperform as the trend general upward trend in equities remains intact. According to the JPM team, this is explained by the fact that the value factor has always been correlated with the rise of the markets.

While few on Wall Street can reliably predict where the markets are headed next, JPM strategists, including quants like Marko Kolanovic and Nikolaos Panigirtzoglou, managed to call the summer rally that helped lift stocks out of territory. of the bear market.

Interestingly, JPM is one of the only institutions on Wall Street that expects growth stocks to continue to lead, while also anticipating a 75 basis point Fed rate hike in September.

But there are still many who remain cautious, including the BlackRock Investment Institute, which recently advised clients to return to defensive stocks and corporate credit. On Monday, BlackRock issued another note warning investors that the rally in US equities is not worth pursuing.

See: Why BlackRock says the stock market’s big summer rally isn’t worth chasing

But so far at least, the rally has shown few signs of faltering. After opening lower on Monday, all three U.S. benchmarks managed to swing into the green midday, leaving them on course to extend the longest winning streak since late last year.

See: US stocks recover from lower open even as China raises concerns over global growth

Recently, the S&P 500 SPX,
+0.26%
rose 13 points, or 0.3%, to trade just below the 4,300 level, while the Dow Jones Industrial Average DJIA,
+0.41%
advanced 160 points, or 0.5%, to just under 34,000. Meanwhile, the Nasdaq Composite COMP,
+0.39%
gained 50 points, or 0.4%. at 13,095.

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