According to JPMorgan Chase, based on the intensity of capital inflows, the rebound in US stocks is expected to continue, but attention should be paid to the risks of rising US bond yields and increased volatility.
In recent weeks, a series of economic data releases have indicated that the US inflation process is proceeding smoothly and the Fed's interest rate hike is nearing its end. Under the expectation of a soft landing, the market has entered a frenzy mode. The previously soaring US bond yields have dropped significantly, and US stocks have rebounded strongly, driven by small-cap stocks and growth stocks.
However, several institutions have previously warned that the future growth momentum of the US economy is insufficient. In the face of uncertain macroeconomic prospects, can the upward trend of US stocks continue?
In a roadshow last week, Andrew Tyler and John Schlegel, heads of the market intelligence team at JPMorgan, stated that based on the intensity of capital inflows, the rebound in US stocks can continue, but attention needs to be paid to the risks of rising US bond yields and increased volatility.
Can US stocks continue to rise? Yes!
Tyler believes that the rebound in US stocks can continue, and the recent catalysts for the rise are mainly related to macroeconomics and TMT (Technology, Media, and Telecommunications).
From the current data, the macroeconomy presents a scenario of "non-inflationary growth" and "no landing". The TMT catalyst may reignite the artificial intelligence theme and a summer rebound. From May 24th, when NVIDIA's FY24Q1 earnings report was released, to July 31st, the S&P 500 index rose by 11.5%. The Nasdaq 100 index rose by 15.8%, the Russell 2000 index rose by 13.4%, and ARKK, the flagship fund of Cathie Wood's company, which focuses on technology growth stocks, rose by 27.9%.
In addition, the two analysts also stated that the performance of the US economy is better than market expectations:
"If the deflationary trend is controlled, we will see growth above the trend. The actual GDP growth in the third quarter of 5% exceeded any reasonable forecast, but because the $27 trillion economy grew nominally by 8%, I think the time for economic growth to slow down may be later than market expectations."
Previously, JPMorgan economist Michael Feroli had raised his GDP growth expectations for 23Q4 and 24H1, from 1.5% and 2.0% to 2.0% and 0.5% and 0.9%, respectively.
The increase in the nominal GDP growth rate will also promote the growth of corporate profits. If the US maintains productivity growth, the unemployment rate may not soar, and a soaring unemployment rate will not lead to inflation. Feroli also believes that the Fed will cut interest rates by 100 basis points in the second half of 2024. He believes that core PCE will be below 2.5%, and the slowdown in growth will cause the Fed to hit the brakes.
The biggest risk is still US bonds
Looking back at the market performance in recent weeks, analysts pointed out:
"Although there has been a rebound, it is not clear how much stock investors have fundamentally 'bought'. Overall, most of the buying we see comes from index futures, ETFs, and options. In contrast, globally, due to continued long selling (possibly due to profit-taking), high-frequency funds have been lackluster in terms of net inflows into stocks." In the short term, the market is expected to continue experiencing some volatility. However, as the net inflow of stocks this week remains relatively neutral (negative over the past month), the rebound is not yet over.
In the US market, ETFs have seen the largest influx of funds in the past two weeks, followed by energy, banking, and real estate. The TMT sector has seen the most selling, primarily in the media and entertainment industries.
Analysts also point out that the most likely risk in the near future is the rise in bond yields and bond market volatility:
"Although the strong performance of the 20-year US Treasury bond auction may alleviate some concerns, especially with the recent weakening of the US dollar, the driving factors behind the rise in yields and the strengthening of the US dollar have not disappeared during the recent rebound. Therefore, this negative catalyst may resurface."