How did our 2024 Mid-Year Outlook views play out?

November 15, 2024

Our 2025 Outlook launches next week. Here's how our previous views measured up.

It's outlook season on Wall Street

Almost six months later: How did we do?

What comes next?

Contributors

It's outlook season on Wall Street

It may be hard for some to believe, but there are less than 50 days remaining in 2024. For many of us on Wall Street, these next months of cold weather, holiday lights and sweet treats also mean it is time to release investment outlooks for the year ahead.

Before we launch our Outlook for 2025 next week, we wanted to check in on how the key views contained in our 2024 Mid-Year edition have unfolded.

Almost six months later: How did we do?

Take 1: The economy may be stronger than you think.

In June, we thought the economy looked to be at its healthiest in decades. Since then, we have seen just that. Third quarter real growth in the U.S. has remained around 3%, the unemployment rate has held at about 4% and inflation has continued to fall meaningfully from its 2022 peak. Elsewhere, European growth seems to have bottomed, while global manufacturing is largely turning higher. That said, we would be remiss not to acknowledge some of the bumps along the way, particularly in pockets like the labor market in the U.S., which seem to be in the rearview.

All this to say, we have seen the economy continue to chug along. That is quite a feat against a historically restrictive rate environment. That steady momentum has allowed central bankers to kick off a long-awaited easing cycle. Of the 37 global central banks that we track, 27 are cutting policy rates, including every major central bank besides Japan. We think this gradual and coordinated global effort is set to continue and ultimately drive growth forward from here.

We do see outsized strength in the U.S. from here, though. That is because we believe the Federal Reserve is cutting policy rates to extend the current cycle and secure a soft landing. With the election behind us, we also anticipate a Republican majority to deliver largely pro-

growth policies. This, in addition to resilient consumer and robust corporate earnings, has laid a solid foundation for markets to grind higher in the year ahead.

The era of rate hikes is over for now

Number of central banks with last move as a hike vs. a cut



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Take 2: Higher rates will likely have consequences.

Higher rates have not cracked global economies, but they have created pockets of stress. Elevated rates make borrowing expensive for companies and consumers alike. Per macroeconomics 101, that can throw cold water on economic activity by decreasing the propensity to spend across the board (including hiring workers or building a fancy new factory). And while this may be an oversimplification, that relationship keeps prices in check.

As investors, we have instead seen higher rates create opportunity. When it comes to commercial real estate, for example, rate dynamics have created a wide dispersion in

commercial real estate prices, and significant variation across sectors and regions. For example, central business district office prices are down 31% year-over-year, but suburban office is down only 4.7% and industrial properties are up 6.5%.

The consequences of higher rates in this case have given nimble investors a rare buying opportunity. Alternative managers have already given the signal: the industry has set aside $400 billion of dry powder for property investment, with about 64% dedicated to U.S. properties - the highest share in two decades.

Take 3: Do not underestimate artificial intelligence (AI).

We think that is a fair assessment given that the AI story has developed and evolved more than many thought possible in the second half of the year.

Today, Magnificent 7 capital spending now exceeds that of the entire energy sector and we have begun seeing that feed through to earnings (e.g., Meta's increased advertising revenues). That means the capex spend from hyperscalers is likely to stay elevated. As productivity boosts become more widespread and infrastructure demand increases, we would expect other sectors to capture that value.

Looking ahead, it is more clear than ever that AI advancement requires the right (read: scalable and efficient) 'highways and pipes' to flourish. As such, we see the AI infrastructure build-out as a huge and importantly, a tangible tailwind for the economy. Some Street analysts estimate global AI infrastructure spending to hit $1 trillion by 2028.

As the build out continues, we are more focused than ever on the broad impact it will likely have on productivity, cost saving and revenue generation across industries.

If we assume that half of the vulnerable jobs in the United States are automated away over the next 20 years, then the cumulative productivity gain would be nearly 18%, or $7 trillion beyond the current Congressional Budget Office (CBO) projection for gross domestic product (GDP). That is meaningful, and going forward, we think developed market GDP growth from AI could be 0.2% per year for the next decade.

u.S. labor productivity growth; indexed at 100 for 2023



 Sources: IMF, J.P. Morgan Private Bank. Data as of January 31, 2024. Note: CBO baseline calculated using real GDP proj divided by number of hours worked. Al induced potential upside projected assuming 15% of jobs will be replaced by AI next 20 years which is half of what IMF suggested in research.

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Take 4: The next president will make the deficit worse.

That is still true even as we stand today with the results of the 2024 election in hand. The bottom line? Regardless of who won the election, deficits are set to increase. Now that we know President Donald Trump will be in the Oval Office, we may have a better idea of the degree to which that may happen.

As Michael Cembalest pointed out in his paper, Mind the Gap, President Trump's policies would potentially increase the deficit by about four trillion. But that number is likely to come down given thin margins for Republicans in the House and Senate.

Still, markets have spoken. The sharp move in bond yields suggests looser fiscal policy on the horizon. That may also yield better growth prospects and result in a higher landing place for the Federal Reserve and higher inflation.

Projected U.S. debt to GDP ratio has shifted higher

u.S. government debt to GDP ratio, %



Sources: CBO, Haver Analytics. Data as of August 15,2023.



Take 5: Prepare for continued conflict.

Conflict has largely defined much of the geopolitical narrative in the back half of the year. Armed conflicts remain at 80-year highs alongside active wars in the Middle East and Europe. As such, price action (particularly oil and gold) in the past few months has reflected anxieties and uncertainties related to the unpredictable nature of these risks.

We think continued conflict is likely to persist and inevitably evolve. However, our advice about how investors can best prepare for it has not. Diversification can help mitigate geopolitical risk for most investors. Furthermore, history tells us that geopolitical events very rarely leave a lasting negative impact on U.S. large-cap equity markets.

What comes next?

With 2024 largely in the rearview, we are excited to share our 2025 Outlook with you in the coming days. In it, we'll share our insights and top ideas for the year ahead. Spoiler alert: We expect the strength to only build from here.

All market and economic data as of 11/15/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

Private investments are subject to special risks. Individuals must meet specific suitability standards before investing. This information does not constitute an offer to sell or a solicitation of an offer to buy. As a reminder, hedge funds (or funds of hedge funds), private equity funds, real estate funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors

Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment, and reinvestment risk.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.

Private Equity is typically composed of Venture Capital, Leveraged Buyouts, Distressed Investments and Mezzanine Financing, which are all generally considered to be high risk, illiquid investments designed to deliver larger expected returns than publicly traded securities as compensation for their greater risk. As a result, investing in Private Equity is not suitable for all investors.

Index definitions:

The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight of the index total at each quarterly rebalance.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate passthroughs), ABS and CMBS (agency and non-agency).

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

Standard and Poor's 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941-43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

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RISK CONSIDERATIONS

• Past performance is not indicative of future results. You may not invest directly in an index.
• The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to 'stock market risk' meaning that stock prices in general may decline over short or extended periods of time.
• Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
• In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.
• When investing in mutual funds or exchange-traded and index funds, please consider the investment objectives, risks, charges, and expenses associated with the funds before investing. You may obtain a fund's prospectus by contacting your investment professional. The prospectus contains information, which should be carefully read before investing.
• Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the alternative minimum tax (amt).
• International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the u.s. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in international markets can be more volatile.
• Investments in emerging markets may not be suitable for all investors. Emerging markets involve a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the u.s. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in emerging markets can be more volatile.
• Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
• Real estate investments trusts may be subject to a high degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower.
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• As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.
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