Markets may have drifted through the summer, but JP Morgan thinks the fog could soon lift – especially in Europe.
In its latest strategy chartbook, the bank’s team, led by Mislav Matejka, is inching towards a more constructive stance on eurozone equities, having correctly called a period of consolidation earlier in the year.
Back in March, they argued that the Euro Stoxx 50 index looked overbought after a strong rally. Since then, it has indeed stalled, both in absolute terms and relative to the US.
Now, with sentiment cooled and positioning more balanced, the stage may be set for a rebound. “We now think the time is approaching to start adding to the Eurozone again,” the team writes.
The tone is cautious rather than euphoric. European cyclical stocks (companies whose fortunes are closely tied to the economic cycle) have lost ground in the past month.
Much will depend on the labour market, with upcoming payroll data likely to shape the direction of travel. If employment weakens further, the case for easing by central banks could grow stronger.
Currency movements may also play a role. JP Morgan sees further weakness in the US dollar as likely into the end of the year. With real interest rate differentials narrowing, the dollar “does not look outright cheap”, they argue.
That could be a tailwind for emerging markets, a rare bright spot in a tricky global backdrop.
One market that’s surprised to the upside: China. A-shares have rallied in recent weeks, which JP Morgan finds encouraging – even if many global investors remain wary.
Elsewhere, the team is holding on to its preference for long-duration assets, pointing to softening US labour data and the risk that any inflation from new tariffs could erode consumer spending.
A more dovish Federal Reserve response would benefit longer-dated bonds and growth-style equities.
But there are signs of change beneath the surface. The long-standing tilt towards large-cap growth and developed markets could be due a rethink. “Style-wise, we continue to believe that in 2025 there will be a change in leadership,” the note says.
Small caps, those perennial underperformers, are finally showing signs of life, especially in Europe and Japan.
JP Morgan advised investors in the summer to start adding exposure. Even in the US, which has lagged, there may be a “better spell ahead”.
So, after a long pause, Europe may be back on the radar. While risks remain, the mood music is shifting. Investors with an eye on small caps and a softening dollar may find it pays to look beyond the S&P once again.