Morgan Stanley: The US stock market is unlikely to replicate the performance of 2017, and the market may shift towards defensive sectors
JP Morgan released a report stating that there are significant differences between the U.S. stock market and 2017, and it expects the market to shift towards defensive sectors. Due to factors such as sluggish economic activity and increased trade uncertainty, the S&P 500 index fell by 10% from February to March. The bank believes that the market may have some breathing room in the short term, but it expects the stabilization trend to be difficult to sustain, with the overall trend differing from 2017 and facing stagflation risks
According to the Zhitong Finance APP, JP Morgan recently released a stock strategy report, stating that the current differences between the U.S. stock market and 2017 are still worth noting, but there may also be some similarities. The bank expects that adverse factors such as economic activity stagnating in the second and third quarters and increased trade uncertainty will resurface, leading the market to shift towards defensive sectors.
From February to March, the S&P 500 index fell by 10%, and the rally of the "Magnificent Seven" completely reversed in the fourth quarter, resulting in the market being technically oversold, with both long and short indices at low levels. JP Morgan believes that this situation provides a potential breather for the market in the short term, but it expects the stabilization trend to not last long. The bank anticipates that in the second and third quarters, adverse factors such as renewed economic stagnation, increased trade uncertainty, and severe inflation will dominate, suppressing stock prices and bond yields, and pushing the market towards defensive sectors.
From a macro perspective, the bank's basic expectation for this year is that market trends will differ from those in 2017. The main difference lies in the growth of the S&P 500 index and policy trade-offs. In 2017, the S&P 500 index rose continuously by over 20%, while this year, the bank expects the market to be in a consolidation and digestion phase at least in the first half.
On one hand, the starting positions of the market are completely opposite. In November 2024, investors, after experiencing a wave of "fear of missing out" (FOMO), had positions close to high levels; whereas in November 2016, due to extremely cautious investor outlooks, positions were at low levels. In November 2016, the valuation multiple of the S&P 500 index was 17 times, while it is currently 21 times.
The growth outlook, inflation, and bond yield backgrounds are also different. 2017 can be seen as a re-inflation period, while the bank currently faces stagflation risks: economic activity is gradually stagnating while inflation expectations are rising. The level of fiscal deficit is also significantly different, and crucially, there is a divergence in policy sequencing.
Another difference is the leadership position of technology stocks. In 2017, the "Magnificent Seven" rose by 45%, with a starting valuation of 20 times. This year, the "Magnificent Seven" has fallen by 12%, with a price-to-earnings ratio still at 27 times. The bank remains pessimistic about the group's performance in 2025.
Finally, the policy focus contrasts sharply with that of 2017. Although the major event dynamics this week may not exert much pressure, trade uncertainty has not yet peaked. In 2017, the market implemented supportive policies, followed by tariff measures in 2018.
This time, trade uncertainty is leading; if companies are to concede and begin relocating production to the U.S., this uncertainty may persist for a longer time. To achieve this goal, the current U.S. government cannot allow companies to see through its tariff threats as bluster. Even if future tariff announcements are subsequently rescinded, the blow to corporate confidence may still linger.
The main similarity is that international markets may perform better than the U.S. market, just as in 2017. The starting multiples in international markets are lower, and compared to the U.S., fiscal policy support in Europe and China is increasing. Importantly, the dollar may weaken, similar to 2017. The real interest rate differential may narrow, indicating that the dollar could further depreciate in the future That said, the bank does not believe that the market will experience a directional decoupling. If the market faces pressure in the coming months due to the difficult trade-off between growth and policy, then international stock markets will also be constrained, but during periods of market volatility, they may not need to exhibit high beta values compared to the U.S. stock market as they have historically