JPMorgan warns global growth slowdown could limit equity market returns

JPMorgan strategists warn that record U.S. corporate buybacks are vulnerable to a slowing global economy, potential labor market weakness, and rising capital expenditure, which, alongside slowing profit growth and stretched valuations, could weigh on U.S. equity returns. Conversely, they are more constructive on European equities, projecting improved earnings from 2026 and higher shareholder yields, recommending adding to Eurozone positions with a 5,800 Euro Stoxx 50 target by December 2025. The bank also anticipates a 2025 market leadership shift towards Value and small caps, particularly in Europe and Japan, while favoring emerging markets and sectors like Chemicals and Defense.

Analysis

JPMorgan strategists forecast significant headwinds for U.S. equities, citing elevated risks to the record-setting pace of corporate buybacks, which have reached nearly $1 trillion year-to-date. This support mechanism is threatened by a slowing global economy, weakening labor markets, and a documented dip in CEO confidence. Furthermore, the bank anticipates that fiscal policies encouraging U.S. manufacturing will drive higher capital expenditures, diverting free cash flow away from shareholder returns. This pressure on capital returns is compounded by a stretched S&P 500 valuation of 23 times forward earnings and an outlook for decelerating profit growth, as JPM warns that consensus estimates of 11.2% for 2025 may be too optimistic and that profit margins are at risk. In contrast, the firm presents a more constructive view on European equities, which it suggests are becoming attractive due to a superior total shareholder yield compared to the U.S. and an expected earnings improvement in 2026-2027. JPMorgan has set a December 2025 target of 5,800 for the Euro Stoxx 50, implying a 6% upside, and recommends investors begin adding to Eurozone positions. The report also flags a potential 2025 leadership rotation from Growth and large-caps towards Value and small-caps, particularly in Europe and Japan, while maintaining an Overweight stance on emerging markets and favoring sectors such as Chemicals, Defense, and Metals & Mining.

Key Decisions for Investors

• Investors should scrutinize U.S. equity exposure, particularly in large-cap growth names, given JPM's warnings about stretched valuations and the vulnerability of buyback programs to economic and confidence shocks.
• Consider a tactical allocation increase towards Eurozone equities, which offer a comparatively higher shareholder yield and potential for an earnings recovery, with a focus on value and small-cap segments.
• Re-evaluate sector and regional weightings by potentially reducing exposure to Autos and Semiconductors while exploring opportunities in Chemicals, Defense, Metals & Mining, and broader emerging markets.
• Monitor U.S. labor market data and corporate sentiment surveys closely, as any significant deterioration could act as a key signal for a slowdown in buyback activity, a critical support for current market levels.