...geopolitical factors will likely lead to more adversities and headwinds for the global economy
...Russian retaliation against Ukraine bomber strike could trigger Western sanctions against Russia with potential spillover into China as buyer of Russian oil. This could lead to the next phase of trade war that could boost supply restrictions/embargo and result in higher commodity prices. Higher prices would be final coffin in the nail in demand destruction materialising in Stagflation but probably won't happen until 2026.
...This puts a lid on the Fed's rate cut. Stagflation a risk for US stock rally: JPMorgan
Timothy Moore
JPMorgan strategists, led by Mislav Matejka, say the likely combination of rising inflation and slower growth is poised to stall the recovery in US equities.
Short covering and re-risking have led to more normal volatility and a recovery in investor sentiment. “Consequently, future equity moves should be more driven by fundamental outcomes, rather than technicals.”
The strategists said: “Past front-loading of orders in the run-up to tariffs is likely to have a payback, there will be some weakening in consumer due to squeeze in purchasing power, and even with dramatic backpedalling, the current tariffs picture is worse than most thought at the start of the year.”
At the same time, Matejka sees the chances of inflation rising, in line with inflation expectations.
“The above combination, if it were to materialise, is likely not conducive to a continued rally, especially in light of S&P 500 trading at 22x forward, on 10 per cent [earnings-per-share] growth expectation for this year, and 14 per cent for next.
“These levels are far from pricing in any meaningful downside risks, especially as current positioning is closer to [Fear of Missing Out] November 2024 peak, than to the 2022 lows.”
Matejka said tech was continuing to show strong fundamentals, but “the concentration risk is extreme”.
“Trade uncertainty is in theory less of a headwind for the US, at least relatively. If markets relapse into weakness, the US has typically held up better than other regions during risk-off periods, but this time around tech and [US dollar] might not be the ‘safe’ havens.”
