JPMorgan backs equities in first half as earnings broaden

JPMorgan expects equities to deliver positive returns in H1 2026 as easing inflation, steady growth and broader earnings offset US labour-market risks, noting the S&P 500 trades at roughly 23x forward earnings and that December’s consolidation improved the risk-reward after the Fed’s December rate cut. The bank is overweight Eurozone equities—citing a likely 2026 profit rebound as German fiscal stimulus and ECB cuts take effect—and overweight emerging markets (favoring China tech, Korea and A‑shares), while remaining cautious on US valuations, avoiding energy and preferring European banks, basic resources and select defensive sectors.

Analysis

Market structure: Easing inflation, dovish central banks and fiscal stimulus tilt the winners toward cyclical, value and Europe/EM cyclicals while penalising long-duration US tech and energy. Expect rotation pressure to compress the US ‘‘Magnificent Seven’’ premium if 10y yields remain <3.75% and S&P forward P/E re-rates toward 20–21x over H1 2026. Commodities are bifurcated: oil downside risk vs metals upside if China demand re-accelerates, which boosts miners' EBITDA leverage.

Risk assessment: Key tail risks are sticky US wage inflation prompting Fed hikes (reversal if payrolls surprise +300k/mo persist), a China growth shock (PMI <48 for two months) or geopolitical shocks to energy/Taiwan. Immediate (days–weeks) volatility driven by labour prints and positioning; medium-term (months) by ECB/ECB cuts realizing and Chinese stimulus efficacy; long-term (quarters) by earnings broadening. Hidden dependency: Europe’s rebound is contingent on German fiscal execution and credit growth pickup, not just ECB cuts.

Trade implications: Implement relative-value and option plays: favor Eurozone equities and EM cyclicals while underweight US mega-cap growth and energy. Use pair trades to hedge beta: long Euro Stoxx 50 vs short S&P 500, and targeted long miners/banks exposure with options hedges to limit drawdowns. Liquidity and implied vols are attractive for buying downside protection (3–6 month puts) while selling short-dated vol where positioning is elevated.

Contrarian view: Consensus underestimates the chance that US labour softness continues, which would force a faster Fed easing cycle and re-rate cyclical/EM assets more than US growth; conversely the market may be too sanguine on Europe if German fiscal/credit recovery stalls. Energy shorts are crowded and vulnerable to supply shocks; miners’ discount to spot may persist if Chinese restocking disappoints. Trade with tight catalyst-based sizing and explicit stop/profit rules.

Key Decisions for Investors

• Establish a 3.0% notional pair trade: long FEZ (SPDR EURO STOXX 50 ETF) 3% vs short SPY 3% (equal dollar) between Jan–Jun 2026; target relative outperformance +8–12% by June 30, 2026; cut if SPY outperforms FEZ by >6% or if Fed dot median signals >3.75% 10y-equivalent path.
• Build a 3.0% EM/China cyclical block: 1.0% ASHR (China A-shares), 1.0% KWEB (China internet/tech) and 1.0% EWY (Korea ETF) from Jan–Jun 2026; add up to +2% if USDCNY weakens >2% or PBOC cuts benchmark ≥25bps; exit/trim if China PMI <47 for two consecutive months or on a 10% drawdown.
• Implement a defensive options position: buy June 2026 XLE 10–15% OTM put spread (cost ~0.3–0.7% of portfolio) sized to equal a 1.5% notional short energy exposure to capture oil downside while capping premium paid; widen or add if Brent < $70 or oil inventories stay elevated.
• Purchase tail insurance: allocate 0.5–1.0% of portfolio to June 2026 2–3% delta SPY puts (or equivalent put spread) to hedge a sticky-inflation/Fed-hike shock; if realised volatility <15% and puts cheap, roll/extend through Q3 2026.