JPMorgan traders have been right about the rally so far, but they are losing conviction

JPMorgan's trading desk, having accurately predicted the S&P 500's rally to record highs, is now maintaining its "tactically bullish" stance with "lower conviction." This shift is driven by concerns over potential higher inflation stemming from tariff-induced costs and wage pressures, alongside a possible re-escalation in global trade conflicts. Furthermore, the desk warns the upcoming Federal Reserve rate cut could trigger a "Sell the News" event, despite acknowledging continued AI momentum and strong earnings growth projections.

Analysis

JPMorgan's trading desk, after accurately forecasting the S&P 500's ascent to all-time highs, has shifted its outlook to "tactically bullish" but with "lower conviction." This increased caution is anchored in two primary macroeconomic concerns: rising inflation and escalating trade conflicts. The desk points to commentary on tariff-induced cost passthrough and a tightening labor market as potential drivers for sticky wage inflation. Concurrently, it sees a risk of renewed trade tensions between the U.S., China, and the European Union. Despite these headwinds, the fundamental drivers of the rally persist. The artificial intelligence theme remains robust, validated by recent strong earnings from Nvidia and Broadcom. Furthermore, corporate earnings growth is solid, with Q2 profits up 11.3% year-over-year and Q3 projected to grow 7.5%, according to FactSet data. However, a significant near-term risk is a potential "Sell the News" event following the anticipated 25 basis point Federal Reserve rate cut, as stretched positioning, weaker buybacks, and waning retail participation could prompt a pullback.

Key Decisions for Investors

• Given the reduced conviction and potential for a 'Sell the News' event post-Fed meeting, investors might consider protecting recent gains without abandoning a bullish stance on the market.
• Maintain exposure to secular growth themes like Artificial Intelligence, as exemplified by Nvidia and Broadcom, which continue to demonstrate strong fundamental momentum despite broader macro uncertainty.
• Closely monitor this week's producer and consumer price index data, as inflation figures are a key variable influencing both Federal Reserve policy and JPMorgan's cautious outlook.
• Evaluate positioning ahead of the September 17 Fed meeting, recognizing that while a rate cut is priced in, the market's reaction could be negative due to profit-taking and a re-evaluation of macro data.