Shift your investment strategy to favor value-centric holdings.
In the ever-evolving world of finance, J.P. Morgan Asset Management offers a strategic approach to navigating the current market landscape.
According to their latest insights, the favorable segments for investment include megacap technology stocks, cyclical sectors, value stocks, international equities, fixed income diversification, and mid-market private equity.
Megacap technology stocks, driven by strong earnings and artificial intelligence demand, remain attractive despite some recent underperformance. Cyclical sectors and high-beta plays are recommended for capitalizing on ongoing equity market rallies, especially as trade deals and economic data improve.
Value stocks, which have outperformed recently, are considered part of a balanced equity allocation. International equities have also shown strong performance and are seen as an essential element for portfolio diversification. Diversified fixed income has provided income and downside protection amidst rising yields, making it a favorable element for portfolio diversification.
In the mid-cap sector, there is growing collaboration among financial sponsors and private equity, indicating opportunities in mid-market investments focused on private equity and sponsored deals.
J.P. Morgan's framework emphasizes looking at factors such as stock dispersion, valuations, and diversification opportunities to identify attractive segments. Equity factors are assessed through spreads between top and bottom quartile stocks, while macro factors are evaluated through market dispersion metrics.
Despite a wide valuation gap between value and growth stocks, undervalued value stocks have a P/E of 11. However, some sectors like growth stocks seem expensive, requiring caution.
The tech sector's valuations indicate a gap not seen since the tech bubble around the millennium, with the fastest-growing companies trading at 38x P/E. Yet, the tech sector continues to present opportunities, particularly for companies heavily affected by the pandemic, such as banks, cyclicals, industrials, and travel companies, which are now showing signs of recovery.
Online retail and streaming services, still in the early stages of their development, indicate long-term growth potential. Periods of high inflation have historically been supportive of value stocks, which could be a factor to consider given the expected recovery and the end of the era of low interest rates in the US.
Investors should rebalance their portfolios more towards value stocks given the expected earnings growth. However, selectivity is crucial, as not the entire market is overvalued. Inflation is a macroeconomic factor that doesn't necessarily mean profit losses for companies.
Corporate profit recovery is above average in terms of strength and breadth. Earnings expectations are mostly average or below average due to markets being far along. Yet, published numbers for the second quarter look even better, with earnings up around 50%.
Last year, these companies outperformed by 68 percent, indicating significant optimism about their future earnings potential. However, some expectations may be disappointed, so this should be kept in mind when allocating stocks.
In conclusion, a strategy combining megacap tech, cyclicals, value, international equities, fixed income diversification, and mid-market private equity/support for succession planning aligns with J.P. Morgan’s current market outlook and investment approach. Equities still remain an important asset class, but now is not the time to significantly increase allocation, rather to adjust selectively.
Economic and social policy should consider the strategic investment opportunities presented by megacap technology stocks, cyclical sectors, value stocks, international equities, fixed income diversification, and mid-market private equity, as suggested by J.P. Morgan's current market outlook.
Individuals engaging in personal-finance management may find value in rebalancing their portfolios towards undervalued value stocks and selectively investing in megacap technology stocks, cyclicals, and mid-market private equity, while maintaining a balanced allocation of international equities and diversified fixed income.
