JPMorgan-Equity Strategy Sector and Style leadership ahead of rate cu...-108417752.pdf

GlobalMarketsStrategy28May2024JPMORGANwww.jpmorganmarkets.comEquityStrategyMislavMatejka,CFAAC(44-20)7134-9741mislav.matejka@jpmorgan.comJ.P.MorganSecuritiesplcPrabhavBhadani,CFA(44-20)7742-4404prabhav.bhadani@jpmorgan.comJ.P.MorganSecuritiesplcNityaSaldanha,CFA(4420)77429986nitya.saldanha@jpmchase.comJ.P.MorganSecuritiesplcKarishmaManpuria,CFA(91-22)6157-4115karishma.manpuria@jpmchase.comJ.P.MorganIndiaPrivateLimitedDefensivesstruggledwhenbondyieldswouldbemovinghigher…thisphasemightbeending901101301501701902100%1%2%3%4%5%6%7%00020406081012141618202224US10YbondyieldMSCIWorldUtilities,HealthcareandStaplesrelativetoMSCIWorld(rhs,rs)ThereisapatternofEuropeansmallcapsbouncingonceECBstartscutting...98100102104106108110112-12m-9m-6m-3m0m3m6m9m12mMSCIEuropeSmallvsLargeCapsmedianperformancearoundECBfirstcut…theinflectionisvisiblearoundfirstFedcuttoo,butwitha6monthslag949698100102104106108110-12m-9m-6m-3m0m3m6m9m12mMSCIUSSmallvsLargeCapsmedianperformancearoundFedfirstcutSource:J.P.Morgan,BloombergFinanceL.P.•Inthisreport,wefocusontwotopics:first,atsectorleveltheCyclicalsvsDefensivesperformanceintoratecutsandagainstthebackdropoffallingbondyields,andatthestylelevelontheperformanceofLargevsSmallcaps.•Historically,Defensivesandbondproxiesstruggledwhenbondyieldswouldbemovinghigher-topchart.Thisphasemightbeending.Now,inNov-DecepisodeCyclicalsralliedasUS10-yearyieldnosedived120bp,from5.0%to3.8%,butthebackgroundherewasthemarketanticipationofactivityacceleration,tobespurredonbyFedpivotandeasinginfinancingconditions.ThatiswhyRussell2000brieflybeatS&P500atthetime.•Thistimearound,thebackdropcouldbethesofteningactivitymomentum,asseeninanotablefallinUSCESImostrecently,intonegativeterritory.Ifbondyieldsarefallingaseconomicgrowthismoderating,thesectorleadershipislikelytobemoreDefensivelytilted.Indeed,inQ2sofar,DefensivesareaheadinboththeUSandinEurope.•Additionalconsiderationsare:valuations-CyclicalsaregenerallytradingstretchedvsDefensives,pastperformance-theCyclicalrunoverthelast18monthshasopenedupagapwithPMIs,whichhasnotclosedyet,andfinallytheweakerrecentearningsdeliveryofCyclicalvsDefensivesectors.WearguedinearlyAprilthatUtilitiesandRealEstateinparticularwerelikelytorebound,irrespectiveofwherebondyieldsgo,andwestaypositiveonthesegroups.WekeepfavouringabarbellofDefensivesandCommodities.•WithrespecttoSmallvsLargecapsstyletilts,thereisatypicalpatternofweaknessinSmallcapsinto,andareboundpostthestartofcentralbankseasing.ThisisvisibleforboththeEurozoneandUKsmallcaps-middlechart.•FortheUSSmallvsLargecaps,theweaknessintothefirstFedcutisseentoo,buttherewasnoimminentrebound,moreaweakerperformanceforanothersixmonthsorso,andonlythenarecovery-bottomchart.WeinterpretthisasUSSmallcapsneedingaseriesofratecutsinordertorally,forthemovetogaintraction.•Anadditionalconsiderationforsmallcapstrade,beyondthefinancingconditions/rateview,andbeyondthecorporateactivityoutlook,islikelythedomesticeconomicbackdrop,assmallcapstendedtobebiggerbetaplaysondomesticactivity.Here,Europeangrowthhadaresetlas