By Sam Boughedda
In a note to clients on Friday, JPMorgan analysts said the firm sees equities continuing to squeeze higher into December.
"Inflation has been the key downside driver of equity performance YTD as CPI has exceeded expectations in the last six quarters and often by a large margin," wrote the analysts, who added that while forward earnings will likely remain under pressure, the "inflation tide may finally be turning" and providing some relief to equity multiples.
While the firm believes equities will squeeze higher into December, they added that they also see an increasingly challenging growth backdrop in 2023, assuming central bank policies remain restrictive.
"Absent a full-fledged recession and labor market contraction, lower inflation prints should provide some relief to equity multiples, which have compressed sharply from 21.5x to 15x at the lows as long duration assets (Tech, Communication Services, hyper-growth segment) have seen severe multiple compression. While JPM Economics expects core CPI inflation to reach 3.9% in 3Q23 from 6.3% in 3Q22, the disinflation wave could be much quicker and stronger if the economic slowdown is deeper, which would result in sharply lower EPS on weaker demand and pricing power/margins," the analysts wrote.
"We see a low probability of a 'stagflation' scenario in the US, especially with the Fed almost solely focusing on inflation, stronger USD, and recent declines in commodity space. After the strong CPI prints of the last several months, we believe inflation is heading the other way (absent another large commodity shock this winter)."