Unlock Premium Data: Up to 50% Off InvestingProCLAIM SALE

JPMorgan recommends defensive, commodity stocks ahead of rate cuts

Published 05/28/2024, 04:40 AM
© Reuters.
US500
-
US2000
-

JPMorgan strategists believe investors should consider shifting towards defensive and commodity stocks in anticipation of upcoming rate cuts by central banks.

Historically, defensives have struggled when bond yields were rising, but this phase might be ending, the Wall Street giant notes.

Now, during the November-December episode, cyclicals rallied as the US 10-year yield tumbled 120 basis points, from 5.0% to 3.8%. According to JPMorgan, the rally was driven by market anticipation of an acceleration in activity, spurred by a Fed pivot and easing financing conditions. As a result, the Russell 2000 briefly outperformed the S&P 500 during that period.

“This time around, the backdrop could be the softening activity momentum, as seen in a notable fall in US CESI most recently, into negative territory,” strategists wrote in a Tuesday note.

“If bond yields are falling as economic growth is moderating, the sector leadership is likely to be more Defensively tilted. Indeed, in Q2 so far, Defensives are ahead in both the US and in Europe,” they added.

The current market environment, marked by falling bond yields and softening activity momentum, supports this defensive tilt.

The strategists believe that utilities and real estate sectors are particularly likely to rebound, regardless of bond yield movements. Despite recent uptrends, these sectors remain attractive based on valuation metrics, with utilities being the top-performing defensive sector in the US.

In addition to defensive stocks, the bank also recommends a barbell strategy that revolves around commodity stocks. To be more specific, JPMorgan said its commodity strategists are bullish about industrial commodity prices for the second half of the year, “which should support Miners’ earnings per share,” the note states.

In terms of large versus small-cap stocks, JPMorgan maintains a cautious stance on small caps, particularly in the US, where they expect them to necessitate a series of rate cuts to rally. However, they see potential in European and UK small caps after the start of rate cuts in those regions.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.