JP Morgan predicts "challenging" backdrop for stocks in first half of 2024

JP Morgan anticipates a challenging environment for stocks in the initial half of 2024, attributing the uncertainty to economic factors impacting the outlook for high-risk assets. The bank suggests that equities may face challenges as a result of earnings adjustments amid a slowdown in activity. The strategists at JP Morgan, led by Mislav Matejka, express the view that the risk-reward dynamics for equities will likely improve fundamentally after the US Federal Reserve implements interest rate cuts.

Navigating rate cut expectations

Market indicators, such as Fed funds futures, currently imply the possibility of significant rate cuts in 2024, with a 40 per cent chance of initiation as early as March. JP Morgan warns of flat earnings growth in Europe for 2024 unless a recession occurs, cautioning that expectations for a rebound in corporate performance may be tested due to weakening pricing and volumes.

Despite holding an "underweight" stance on European equities, particularly in food retail, hotels and travel, and semiconductors, JP Morgan notes that European stocks are not excessively priced when compared to the relatively stretched valuations of US stocks. The STOXX 600 index in Europe has risen 7.6 per cent year-to-date, in contrast to the S&P 500's 18.5 per cent increase.

European equities await monetary easing

JP Morgan suggests that a shift in their underweight position on European equities could occur in the latter half of 2024, contingent on the implementation of monetary policy easing. The bank downgrades specific sectors, citing increased price competition in food retail, potential margin contractions in 2024, and concerns over pricing, volumes, and inventory in semiconductor stocks.

Maintaining an "overweight" position in Japanese stocks, JP Morgan sees a more realistic chance for emerging market stocks to potentially outperform, especially if China's economic growth exceeds expectations.

(With Reuters Inputs)