After calling the summer stock rally, JPMorgan says it’s not time for investors to defend themselves yet

It has been a topic of intense debate between portfolio managers and market gurus on Wall Street: Is the stunning summer rally of US equities about to disappear? Or is the profit just beginning?

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

But the arguments underlying their appeal may come as a surprise to some investors.

According to Mislav Matejka, JPM’s head of European and global equity strategy, the size of the Federal Reserve’s next rate hike – expected at its forthcoming central bank policy meeting in September – is not as important as the direction of the Treasury. long term. revenues. So rather than fixate on the size of the Fed’s next rate hike, investors should watch for a steeper yield curve. Only then, according to the JPM team, will value stocks lead the way in growth.

“The key is the direction of long-term interest rates, where the peak was mid-year”
one of the great catalysts for the Growth-style rebound,” Matejka wrote in the research note.

Growth stocks like Inc. AMZN,
have been the stars of the market’s recovery this summer, with shares of some of the hardest hit stocks returning to a position of market leadership.

In order for the curve to steepen again, the JPM team believes the global economy must demonstrate that the slowdown in global economic growth has ended. Overnight, investors were faced with more evidence of this trend in the form of disappointing economic data from China, which prompted surprising interest rate cuts by the country’s central bank.

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

But unlike the latest onslaught of value stock leadership, which has coincided with the brutal market sell-off that marred the first half of 2022, it’s possible – even likely – that investors could see value stocks outperform as the general trend of rising stocks remains intact. According to the JPM team, this is because the value factor has historically been correlated with rising markets.

While few on Wall Street can reliably predict where markets will go next, JPM strategists, including quants like Marko Kolanovic and Nikolaos Panigirtzoglou, have been able to cite the summer rally that helped push stocks out of bear market territory.

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

But there are still plenty that remain cautious, including the BlackRock Investment Institute, which recently advised clients to move back to defensive stocks and corporate loans. On Monday, BlackRock issued another letter warning investors that the rally in US stocks is not worth chasing.

To see: Why BlackRock Says The Stock Market’s Big Summer Rally Isn’t Worth Chasing

But at least the rally so far has shown little sign of losing steam. After opening lower Monday, all three US benchmarks managed to swing into the green by midday, keeping them on track to extend the longest winning streak since late last year.

To see: US equities recover from lower opening even as China worries about global growth

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

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