Rudi's View | 5:42 PM
JPMorgan remains bullish on AI and US equities. Plus a line-up of the latest Best Buy nominations and Conviction Calls ahead of August results.
By Rudi Filapek-Vandyck, Editor
Sometimes it's okay to underperform the index. It's the toll you pay for having a well-diversified portfolio instead of one that is fully hooked on the momentum trade of the moment.
While market turns and twists are notoriously difficult to predict, history shows diversification and risk management pay off in the longer run.
On Thursday morning, journalists attending a financial markets briefing at JPMorgan Asset Management's headquarters in Sydney witnessed Fiona Harris, Head of the US Equity Investment Specialist International Team, making a rather passionate case for common-sense investing in light of extreme volatility and market concentration among a select group of winners.
Rather than attempting to chase whatever seems popular at a particular point in time, Harris' proposition is to concentrate instead on genuine diversification within investment portfolios which, alas, also implies not all of the market's gains will be captured during the wild upswings.
But there will be downdraughts too, as well as rotations and other variations on snakes and ladders. Better to stick with common sense and proper risk management while keeping a firm eye on the longer-term outlook.
JPMorgan's in-house confidence in the strength and sustainability of the AI supercycle hasn't wavered, but both Harris and Sydney-based Global Market Strategist Kerry Craig acknowledged investors globally are nowadays more aware of the potential risks.
As more questions are being asked, investors are becoming more discerning and, with the AI-driven bull market now well advanced, markets will inevitably become more volatile. But nothing nefarious awaits on the nearby horizon; this is simply how financial markets process changing dynamics.
As Jim Carrey's Bruce 'Almighty' Nolan would put it: that's the way the cookie crumbles.
Craig still sees potential for upside surprises from AI capex investment. Harris suggested the broadening in earnings momentum that has shown up in US corporate results this year might well have a longer runway ahead.
Probably the most eye-catching observation put forward by Harris is that Value has been outperforming Growth stocks in the US despite Financials, the largest component of the Value basket, underperforming.
The answer is: memory chips.
JPMorgan is now forecasting AI capex spending by the major US hyperscalers will grow to US$925bn next year, up from a projected US$758bn in 2026. That number is forecast to grow further to US$986bn in 2028.
The current expectation is for the 490 companies outside the ten largest in the S&P500 to catch up, with both market segments projected to grow earnings by circa 15% in 2027.
The implication is that the good days should continue rolling on. The US long-term average for earnings growth is 8% per annum.
Generally speaking, the US remains home to the fastest and highest-quality earnings growth in the world. Current forecasts are for 26% earnings growth for the S&P500 in 2026, followed by 22% growth in 2027.
Craig's message: in the long run, markets follow earnings. There are good reasons to stay Risk On (without ignoring Harris' advice).
What about inflation and the risk of Fed rate hikes?
JPMorgan's in-house view doesn't anticipate any move from the Fed in 2026, but Craig acknowledged that call has become more of a 50/50 proposition.
One rate hike is therefore possible, but it won't change the fact that 2027 should see rate cuts. The same scenario lays ahead for the RBA.
Central banks the world over are seen as being in the final stages of tightening this year.
In a preview of the local August results season, Craig's crystal ball suggests sales and earnings will probably look okay at the headline level, but forward guidance and margins will be in focus as higher costs and multiple domestic challenges present headwinds for the period ahead.
As noted, the RBA is expected to start cutting rates in 2027.
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