2024

A strong economy
in a fragile world
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Foreword
At the start of the year, most forecasters anticipated rapidly falling inflation to allow central
banks to embark on a series of rate cuts. Those were reasonable projections, a fair reading of
the situation at hand.

But the economy has defied the forecasts. Inflation hasn’t declined as quickly as many have
hoped. Still, across a range of macro variables, the global economy looks remarkably strong.

The world is also at a delicate juncture. Geopolitical risk is real, and it is top of mind for
investors large and small. They have a range of concerns. The potential for worsening
global conflict. The unknown outcome—and unknown implications—of U.S. elections in
November. Strains in the U.S.-China relationship. A widespread focus on national security,
in traditional defense, energy sources, supply chains and cybersecurity.

Thus we title our Mid-Year Outlook, “A strong economy in a fragile world.”

On the one hand, higher growth, higher bond yields and higher equity valuations. On the
other hand, higher inflation, higher geopolitical risks and potentially higher taxes.

To prepare for the second half of the year, we draw on the experience of our Global
Investment Strategy Group to help us identify both the risks and opportunities that our
clients may face. In our view, clients can rely on equities to harness global growth, real
assets to insulate against inflation, and bonds to provide income and mitigate risk if
economic growth falters. AI is just getting started. The Mid-Year Outlook notes that it took
15 years for the personal computer to increase the economy’s productivity; AI, we project,
could do it in seven.

In short, we think positive forces can power markets forward in 2024 and beyond.

Whatever markets have in store, we rely on each other and on the relationships we have
forged over time to deliver you our best. We are honored to stand by your side as your
financial partner. Thank you for your continued trust and confidence in J.P. Morgan.

Sincerely,

David Frame Martin Marron

CEO, U.S. Private Bank CEO, International Private Bank
 4

2024 Mid-Year Outlook

Key Takeaways

The economy is stronger than you think.

We think the global market rally should continue.

AI is just getting started.

The path is uncertain, but the impact could be massive.

Rates will be higher for longer, not forever.

Dislocations in interest-rate-sensitive sectors may not last.

The U.S. election will have global effects.

Don’t let them disrupt your plans.

Prepare for continued conflict.

Diversify, and consider investing in security, defense
and infrastructure.
5 TABLE OF CONTENTS

A strong economy in a fragile world

The economy is stronger than you think 9 The U.S. election will have global effects 30

Rates will be higher for longer, not forever 14 Prepare for continued conflict 34

AI is just getting started 25

Global perspectives
Writing a new chapter for Corporate Europe 41

Strong demand, scarce supply: Unearthing profits from critical raw materials 46

Japanese stocks: This time is different 50

 INTRODUCTION 6

Not many
saw it
coming. Global growth is defying the pressure of higher interest rates,
proving stronger and more durable than most forecasters had
expected. At the same time, stubborn inflation has spoiled
market expectations for material rate cuts. Nonetheless, global
equities have returned over 10% so far this year.

Over the past five months, economists have marked up their

2024 projections for global real GDP growth from about
2.5% to 3% and lowered forecasts for Federal Reserve (Fed)
rate cuts from seven to just two. Once-skeptical investors
and policymakers have come to acknowledge that the
economy is not just resilient, it is actually quite robust. And
over a long-term horizon, the potential economic impact of
artificial intelligence (AI) could be substantial—perhaps even
transformative.

In our Mid-Year Outlook, we take stock of the

current environment.
 INTRODUCTION 7

The current environment

looks “higher” than what
we are used to.

Higher growth

Higher policy rates and

bond yields

Higher equity valuations

In fact, a set of key market and macroeconomic variables (inflation excepted)
across developed economies, from unemployment rates to yields on short-term
government bonds, to corporate profit margins, look as healthy as they have in
decades. We expect global equities will power portfolio returns through the rest
of the year. At the same time, more onerous financing costs create the potential
for attractive returns in credit, and discounts in mid-cap equities, real estate and
private equity assets.

And yet...
 INTRODUCTION 8

This new environment

comes at a cost.

WE SEE THE POTENTIAL FOR:

Higher inflation

Higher geopolitical risks

Higher taxes
We think clients should be fully invested—and also alert to the potential risks
facing a strong global economy in a fragile world.

Geopolitical risk is top of mind for investors large and small. The possibility
of worsening global conflict—whether a regional war in the Middle East or an
intensification of what is already the biggest land war in Europe since World
War II—cannot be dismissed out of hand. U.S. elections in November could have
significant economic and market implications, which no one can predict with
certainty. The relationship between the United States and China, the world’s two
largest economies and trading partners, seems to be in a state of inexorable decay.

A strong economy in a fragile world. That’s the backdrop

for investors as we approach mid-year 2024.
 A STRONG ECONOMY 9

A strong
economy
A basic health check shows that calling
the global economy “resilient” undersells
the strength we see.
In the United States, the recent trend in real growth
has been around 3%, the unemployment rate has
been below 4% for the last two years (a near-record
streak), and inflation has fallen from its 2022 peak
to a more tolerable (if above target) rate of around
3%. Elsewhere, European growth is perking up after
an energy price and interest rate shock, while global
manufacturing could finally be turning higher.

From a markets perspective, global equities rose 20%

over the past year, and safe, short-term government
bonds offer positive real yields—what’s not to like?
10 STRONG ECONOMY

Higher growth in a strong economy

Consumers drive what looks to be a durable expansion

The higher growth story starts with the pandemic. Powerful fiscal and monetary which have rarely been better at turning sales into profits. In the United States,
stimulus, combined with economic reopening, jolted global growth to a blistering non-financial profit margins have reached nearly 18%, while in Europe and Japan,
pace of over 15% in nominal terms in 2021. Now, after three years and with the end margins have doubled to 10% over the last decade. Without a material contraction
of a global central bank tightening cycle, growth has slowed to something like a in margins or earnings, it is difficult to envision the kind of broad-based worker
6.5% nominal pace. While nominal growth could slow further through the coming layoffs that would put household incomes at risk.
year, it will still likely settle at a higher pace than the one that characterized most of
the 2010s.

Household income growth in Europe and the United States is nearly 6%, which
has financed strong consumption. At the same time, elevated asset prices and
record net wealth support confidence. That consumption is a boon for companies,

Household incomes are growing, financing strong consumption Companies have rarely been better at turning sales into profits
YoY %, total employee compensation growth Non-financial corporate profits as a % of sales

15% 20%

10%
15%

5%

10%

0%

5%
-5%

Great Recession COVID-19 pandemic

-10% 0%
'05 '07 '09 '11 '13 '15 '17 '19 '21 '23 '47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12 '17 '22
Japan Euro Area United States United States (excluding Federal Reserve Banks) DM ex-United States

Sources: Organisation for Economic Co-operation & Development, NBER, Haver Analytics. Sources: Federal Reserve Board, MSCI, J.P. Morgan. Data as of March 31, 2024.
Data as of March 31, 2024.
11 STRONG ECONOMY

Outside the United States, the growth outlook may be modestly improving. Global
economic data is surprising to the upside, and the global manufacturing sector
could be sputtering to life after a difficult year as firms restock now-depleted
inventories. Even in China, economic data has stabilized despite the continued
overhang from the real estate sector.

Global manufacturing is turning a corner

J.P. Morgan Global Manufacturing PMI (50+ = expansion)
60

55

50

45

40
'99 '04 '09 '14 '19 '24
Sources: J.P. Morgan, S&P Global, National Bureau of Economic Research, Haver Analytics.
Data as of April 30, 2024.

Businesses are also now more likely to invest for growth. CEO confidence is at
the highest level in two years, corporate profits are strong, and improving credit
conditions will likely result in more capital expenditures and hiring. Cyclical,
interest-rate-sensitive sectors could also bounce back if monetary policy becomes
more accommodative. Residential fixed investment (housing) is one of the most
interest-rate-sensitive components of the economy. Output in the sector collapsed
by almost 15% during the rate hiking cycle. Despite still-elevated interest rates, the
sector has started to grow again.

Recession risk, in our view, is relatively subdued. But some investors are still
worried that the growth backdrop will once again lead to unsustainable inflation
and another round of destabilizing rate hikes from global central banks. While
growth will likely keep inflation above central bank targets for the rest of year, we
don’t think it will necessitate another round of central bank rate hikes that put the
business cycle at risk.
12 STRONG ECONOMY

Higher inflation in a strong economy

Inflation likely settles between 2% and 3%

While global inflation has staged an impressive (and market-friendly) drop metrics should moderate this year. This should offset any bounce we see in goods
from nearly 8% to 3%, we see some signs that progress is slowing, especially in prices, given inventory restocking and continued consumer demand. On the labor
the United States. In the first quarter, core PCE prices (consumer prices excluding side, the balance between supply and demand has improved markedly from 2021
food and energy) rose at a close to 4% annual pace, the Employment Cost Index and 2022, and leading indicators of wage growth suggest that the first-quarter
surprised to upside, and market-based measures of inflation expectations jump should reverse.
ticked higher.
Based on our analysis, we believe U.S. inflation will likely settle into a 2%–3%
In the second half of the year, we expect that U.S. inflation will downshift from the range for the foreseeable future.
4% annualized pace seen in the first quarter to below 3% by the end of the year.
First, labor markets are still tighter than they were before the pandemic, which
We believe cyclical disinflation will be driven by cooling shelter inflation and wage fuels stronger wage growth. Even as companies pay higher wages, they enjoy
growth. The leading indicators of rents suggest that the trend in the official shelter greater pricing power, and they are passing on higher prices to consumers.

Wage growth should slow in the coming months

U.S. Indeed Wage Tracker, 3-month MA YoY % ECI wage growth YoY %
12% 7%

10% 6%

8% 5%

6% 4%

4% 3%

2% 2%

0% 1%
'07 '10 '12 '15 '18 '21 '23
Leading wage growth indicator (LHS) Actual wage growth (RHS)

Sources: Indeed Hiring Lab, Bureau of Labor Statistics, Haver Analytics. Data as of March 31, 2024.
13 STRONG ECONOMY

Second, commodity prices have moved higher. That partly reflects the impact of A surge in energy prices would pose a risk to our inflation outlook
industrial policy and the energy transition, which have boosted demand more than Basis points pass-through to non-energy inflation from a 1% rise in energy inflation
supply. Commodity prices now also embed more geopolitical risk. 18

Finally, a shortage of housing across many developed economies will not be

resolved for many years. That should put upward pressure on shelter costs in 2025
and beyond.
12

From an investor’s perspective, 2%–3% inflation will likely be relatively benign.

Based on our analysis of the last 60 years, 3% inflation has marked a key threshold.
Below that level, equity market multiples tend to remain well supported, and the
negative correlation between stocks and bonds is reliable. 6

Equity multiples tend to be supported when inflation is less than 3%

S&P 500 P/E multiples
40x 0
U.K. EMs Spain Japan France Italy Germany U.S. Canada
35x
Including pandemic (2000–Q3 2023) Excluding pandemic (2000–Q4 2019)
30x Sources: Oxford Economics, Haver Analytics. Data as of December 31, 2023. EMs stand for emerging markets,
which in this case includes eight countries: Brazil, Chile, Czech Republic, Hungary, Mexico, Peru, Poland,
25x Romania. Note: A polynomial distributed lag model is utilized to estimate these energy pas-sthrough results.
The dependent variable is CPI ex-energy inflation, and the independent variables are polynomials of energy
inflation with lags up to and including four, and with polynomial orders up to and including two. A one-quarter
20x lag of the dependent variable is also included as a control. The result is the sum of all the coefficients on the
energy inflation variables. The model is estimated with quarterly data from 2000 to Q4 2019 for the excluding
15x pandemic result, and to Q3 2023 for the including pandemic result.

10x
European inflation is much more exposed to potential commodity price volatility,
5x but price growth in the European Monetary Union has returned to more
comfortable levels. Importantly, the inflation overshoot in Europe was much more
0x
driven by energy, food and supply shocks; it did not reflect tight labor markets
0% 2% 4% 6% 8% 10% 12% 14% 16%
and excess demand. European inflation seems on track to return to the European
Atlanta Fed “sticky” inflation, YoY %
Central Bank’s target around the end of the year.
Sources: S&P and Atlanta Federal Reserve. Data as of September 30, 2023.
Upside pressures could keep inflation above central bank targets, especially in the
Of course, a new surge in energy prices—from, say, a regional war in the Middle
United States. That probably means higher policy rates and bond yields, but it also
East—would pose a key risk to our U.S. inflation outlook. How might higher
means stronger corporate earnings and demand for real assets. It is a constructive
energy prices “pass through” to the broader economy? We think it would take a
backdrop for multi-asset portfolios.
sustained 50% rise in energy prices to boost non-energy inflation by 1%. A surge of
that magnitude is unlikely, in our view, given OPEC’s spare capacity, U.S. energy
independence and the geopolitical risk premium that is likely already reflected in
oil prices.
14 STRONG ECONOMY

Higher policy rates in a strong economy

Policy rates in the United States will likely stay above the rate of inflation

At the start of 2024, investors were expecting a meaningful rate-cutting cycle. As we have noted, the U.S. labor market is much healthier than it was in 2022, in
Globally, that seems to be getting underway. But now it seems like the Fed is in a part because the labor supply was boosted by 700,000 more foreign-born workers
holding pattern until inflation falls a bit further. in the first quarter. What’s more, the leading indicators suggest a continued
downward trend in wage growth.
How might the Fed weigh its next move? We think the central bank is in a
position of strength. So long as pressure doesn’t build in the labor market, the Importantly, inflation expectations are tame. Surveys from both the New York Fed
Fed can sit tight and wait for shelter inflation data to improve. If growth does and University of Michigan for one-year ahead inflation expectations remain near
slow unexpectedly in a way that threatens a recession, the Fed can lower interest 3%. Market-based metrics for longer-run inflation have been stable, near 2.5% for
rates and stimulate activity in segments of the economy that would benefit most, the last year.
notably residential real estate.
When the Fed does eventually decide to cut rates, they will likely stay above the rate
Without renewed pressure in the labor market, the case for further rate hikes seems of inflation. That would be consistent with historical trends, as we illustrate in the
relatively weak. chart below.

For most of modern financial history, policy rates have been above the rate of inflation
Core PCE and fed funds rate, YoY %
20%
17%
14%
11%
8%
5%
2%
-1%
Spread between Core PCE and fed funds rate
10%

2%

-6%
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20
PCE Fed funds

Sources: Bureau of Economic Analysis, Federal Reserve Board, Haver Analytics. Data as of March 31, 2024.
15 STRONG ECONOMY

Whenever the Fed cutting cycle begins, investors will need to understand that off the summer with rate cuts. Brazil’s central bank has already lowered its policy
we’re in a very different rate environment. In the 2010s, the Fed embarked on rate from 13.75% last summer to 10.75% today, and some Latin American central
unprecedented monetary policy easing. Policy rates remained well below the rate banks have finished their easing cycles.
of inflation to help consumers and businesses repair their balance sheets after
the global financial crisis. At the same time, economists theorized about “secular The outlier is the Bank of Japan. Japanese inflation and wage growth are finally
stagnation” and the death of inflation. starting to trend at a level that is consistent with the central bank’s policy goals.
Japan offers the lowest yields in the world (Japanese bill yields are still effectively
Those days are gone. The risk of elevated inflation is just as prevalent as the risk 0%), which is putting pressure on the yen. The combination of healthier inflation
of recession, inflation volatility is more elevated, and private sector balance sheets and pressure on the currency points the Bank of Japan toward normalizing interest
are very healthy. For the rest of the year and into 2025, we think the environment rates higher from here—even if its policy stance will remain supportive on balance.
for cash yields will be comparable to the 1990s, when policy rates were ~200 basis
points (bps) higher than the rate of inflation. In this way, policymakers incentivize This shift toward easing should support global risk assets, despite the fact that the
more saving relative to investment, which should help keep a lid on price growth. global cutting cycle will be more staggered than the hiking cycle that started in
2021. This differentiation should also drive opportunity for hedge fund strategies
While the Fed’s own rate-cutting cycle may be delayed, globally the tide has turned that are benefiting from higher base rates. We also see potential opportunity in
decisively from tightening. The Swiss National Bank has already started to lower foreign exchange markets through the end of the year. Defensive, low yielding
interest rates, the first G-10 central bank to do so; and currently, 20 other central currencies such as the Swiss franc, Japanese yen and Chinese renminbi should
banks are cutting rates. The European Central Bank and the Bank of Canada kicked remain under pressure, especially relative to the U.S. dollar.

The Fed is on hold, but global rate cuts are underway

# of central banks with last move as a hike vs. cut
40

30

20

10

-10

-20

-30

-40
'04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24

Central banks hiking Central banks cutting Net hiking

Sources: Individual central banks, Bloomberg Finance L.P. Data as of May 31, 2024.
16 STRONG ECONOMY

Higher bond yields in a strong economy

Bond yields will hold at higher levels than the last decade

Fundamentally, sovereign bond yields reflect investor expectations of future Both theory and practice suggest to us that bond yields are likely to remain elevated,
central bank policy rates, the growth and inflation outlook, and a risk premium to to say nothing of the risks of excessive government debt issuance that increases
incorporate everything else. Given our view of higher policy rates, continued global supply, or of a commodity price shock that could raise inflation expectations. We
growth and sticky inflation, we believe bond yields of all maturities will likely trade see some risks to the upside. But we do believe the turn in global monetary policy
in a higher range than they did in the post–global financial crisis (GFC) era. means that bond yields have already seen their peaks for this cycle.

Yields on 10-year government bonds have a close relationship with nominal GDP For investors, the higher range for bond yields should be comforting. When we do
growth. Today, nominal growth in the United States is above 5%. Expectations for have a cyclical downturn, price appreciation from core bonds should help to offset
central bank policy have also shifted. Recession risk is relatively low, and there is declines in riskier assets. Indeed, we maintain full duration positions in multi-asset
a risk of entrenched inflation, so the chances of a deep global central bank easing portfolios.
cycle seem low.

U.S. longer-term bond yields fluctuate around GDP Investment grade and municipal bonds now broadly outyield cash
U.S. GDP 10-year % change annualized, 10-year Treasury yield Yield %

15% 10%

8%

10%
6%

4%
5%

2%

8.0%
4.9%

8.6%
4.3%
4.5%

4.5%

4.7%
3.9%

3.9%

6.2%

5.6%

7.9%

8.5%
5.2%
0%
0%
'65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 10Y UST 5Y UST 2Y UST Munis (TEY) U.S. IG U.S. HY U.S. Preferreds
(TEY)
GDP growth 10-year Treasury yield Jan 2, 2024 May 31, 2024 Cash yield

Sources: Federal Reserve Board, Bureau of Economic Analysis, Haver Analytics. Data as of March 31, 2024. Source: Bloomberg Finance L.P. Data as of May 31, 2024.
17 STRONG ECONOMY

Tactically, investors do not have to extend into longer-maturity or higher-risk Higher rates offer investors attractive income, and we could even see some modest
securities to earn attractive returns. Indeed, U.S. investment grade corporate bonds price appreciation driven by declining interest rates in the latter half of the year.
that mature within three years yield over 5.5%. In Europe, bonds with similar credit And, as we’ve noted, if the growth outlook darkens, we think high-quality bonds
quality and maturities yield just below 4%. will offer an ample offset to potential equity volatility, especially since we believe
the negative correlation between stocks and bonds will reassert itself so long as
Downgrade risk for high-quality issuers seems relatively low to us. Among inflation continues to settle.
non-financial companies in developed markets, corporate net interest paid as a
percentage of cash flow is at historically low levels.1 At the same time, credit ratings
have never been higher: Over half of the U.S. investment grade bond index is rated
In short: Core bonds can do their jobs in investment portfolios.
A or above, a record.2

All-in yields for U.S. municipal bonds are near 10-year highs, and the recent
sell-off is finally presenting an opportunity for more attractive valuations. The tax
efficiency, stability, and income provided by the asset class makes it the anchor of
many U.S. investor bond portfolios.

Credit markets in a strong economy

The risk-reward profile may be compelling

Strong economic growth and elevated interest rates mean that it is a good time to auto loan payments), and pockets of European and emerging market investment
be a lender by deploying capital in credit markets. Today, we are focused on a few grade and high yield.
strategies with important differences in their risk and return potential.
Preferred stocks and hybrids have even greater excess yields above risk-free rates
Yields are in the high single digits in riskier parts of liquid fixed income markets than high yield, and their high share of qualified dividend income coupon payments
such as certain high yield bonds. increases tax efficiency for U.S. investors. We prefer to stick with higher-quality
financial and utility issuers. Current tax-equivalent yields are over 8%, with only 3.5
High yield bonds can generally be a valuable component of multi-asset portfolios. years of interest rate duration.
Indeed, high yield bonds have returned nearly 3% year-to-date relative to negative
year-to-date performance for core and municipal bonds. Despite spreads that are Direct lending remains a focus for us. In our view, today’s pricing, with current
at their tightest levels in five years, all-in yields are upwards of 8%, and the overall yields to worst of 11%+ (5%+ base rates and 6%+ spreads), more than compensate
default outlook is relatively benign. In fact, high yield bonds could withstand investors for potential default losses. Those yields also compare favorably to the ~8%
spread widening of ~75 bps or an increase in the default rate to 4.4% from less than yields on offer in public high yield markets and the 9% yields on leveraged loans.
3% today and still deliver returns in line with Treasury bills.

Global fixed income investors should also see the potential for attractive income
and risk-adjusted returns in segments of securitized credit (e.g., bonds backed by

1 JPMorgan Flows and Liquidity, Nikolaos Panigirtzoglou, April 3, 2024.

2 JPMorgan Daily Credit Strategy, Eric Beinstein, April 23, 2024.
18 STRONG ECONOMY

Despite higher rates, corporate defaults have stabilized Recent direct loan deals offer yields well above their public high yield counterparts
High yield and leveraged loan default rate, % Yield, %

18% 13%

16% 12%

14% 11% 11.3%

12% 10%
9.4%
10% 9%

8% 8% 8.1%

6% 7%

4% 6%
2.9%
2% 2.3% 5%

0% 4%
'00 '03 '06 '09 '12 '15 '18 '21 '24 Jan '22 Jul '22 Jan '23 Jul '23 Jan '24
HY default rate Lev loan default rate Private credit JPM Loan Index High yield

Sources: J.P. Morgan, Pitchbook Data, Inc. Data as of April 30, 2024. Source: Bloomberg Finance L.P. Data as of April 30, 2024.

While we are broadly positive on extended credit, not all borrowers are created extend” transactions increased by 10x in 2023 from 2022, a sign that higher
equal. More recently, we have seen higher rates challenge smaller corporate rates have started to bite.
borrowers with maturing loans. Indeed, the default rate for leveraged loans has
risen to 3%, which could present an opportunity for specialized credit investors. Credit investors that provide the capital necessary to finance these transactions
When a company’s loan is about to mature, one of three scenarios plays out. In the can earn an additional “complexity premium” above already attractive spreads.
first, the company either pays off or refinances the loan. In the second scenario, the
While traditional lenders are still sidelined, and the cost of money is elevated,
company defaults, declares bankruptcy, and then restructures or liquidates.
it’s a good time to be a new lender. As we assess the credit landscape, we see
Today’s investment opportunity lies in the third scenario. many opportunities to potentially generate yields from the high single digits to
the mid-teens.
Many companies cannot refinance their loans at terms that are similar to their
existing debt agreements. Indeed, the median interest coverage ratio for private
companies that borrow in leveraged loan markets has deteriorated from 2x in
2021 to 1.5x today. But instead of defaulting on a loan and declaring bankruptcy,
the company and its creditors can renegotiate their agreement. These “amend and
19 STRONG ECONOMY

Higher equity prices and valuations in a strong economy

Large-cap equities should benefit from stronger earnings growth and inflation pass-through

Perhaps our most controversial view is that equity valuations should remain well If you compare today’s environment to the post-GFC period, you might think
supported in a higher growth, higher inflation environment. Conventional wisdom stocks are quite expensive relative to bonds. But look back several decades and the
tells us that higher bond yields should decrease equity valuations because the rate picture changes.
at which investors discount future cash flows into today’s dollars is higher than it
would be if bond yields were lower. Here’s why we take a different view. Today, as in the 1990s, we think stocks can maintain elevated valuations despite
higher bond yields. More specifically: We believe the earnings yield should be close
Equities can benefit during inflationary environments because companies can raise to the 10-year Treasury yield. That implies a 20x forward price-to-earnings ratio
their prices while keeping their costs under control. As we have noted, amid the if the 10-year bond yield is 5%. From there, earnings growth should power stock
highest inflation period since 1980, profit margins in developed economies are near markets to new highs.
their widest levels in history. That reflects the power of mega caps whose business
models proved resilient to elevated inflation and rising interest rates. Beyond relative valuations, other important factors underpin elevated equity
valuations. The return on equity for the S&P 500, a measure of how efficiently
Further, history suggests that equities return nearly 15% per year on average when companies generate income for shareholders, is now 19%, five percentage points
inflation runs between 2% and 3%. Even when inflation runs between 3% and 4%, above the long-term average. Further, companies in the index return around 75%
average annual returns are over 8%. of their annual earnings directly to shareholders through dividends and buybacks,
double the average from 1977 to 2003.4
The inflation hedge that equities can provide will be more valuable to investors in
a higher growth, higher inflation environment than it was in the post-GFC period.
We believe the current market backdrop much more closely resembles the 1990s,
when policy rates were high and stable, the yield curve was flat, and increased
productivity and investment pushed stock prices higher.

When investors consider the relative valuation between stocks and bonds, they

75
often compare the earnings yield on stocks (the inverse of the price/earnings ratio)

%
to the yield on 10-year Treasury bonds.3 For most of the 2010s, bond yields were
much lower than the S&P 500’s earnings yield, which implied that safer bonds
traded at a large premium to equities.

This made sense for the environment. The biggest risk to bonds (inflation) was
very low during the 2010s. Investors also worried about the economy slipping into Percentage of annual
recession (the big risk case for equities), given a weaker growth backdrop. Thus earnings that companies in
investors perceived bonds to be much less risky than stocks. Today’s investing the S&P 500 Index return
backdrop is quite different. The risk of recession and the risk of further inflation are to shareholders through
much more balanced. dividends and buybacks.
3 The earnings-to-price ratio effectively derives a yield for the stock market that assumes every dollar of
corporate earnings is paid as a coupon.
4 Michael Goldstein. Market Valuation: A Deal Breaker. Empirical Research Partners, 2024.
20 STRONG ECONOMY

Is the equity risk premium back to the 1990s? Equities can thrive in most inflation regimes
U.S. equity risk premium (S&P 500 earnings yield – 10yr UST yield), % S&P 500 YoY performance in different inflation regimes (1950–2024)

8% 16%

13.8%
6% 14%

12%
4% 10.7%
10%
2% 8.7%
8%
0%
6%
-2%
4%
2.4%
-4%
2%

-6% 0%
'80 '85 '90 '95 '00 '05 '10 '15 '20 0%–2% 2%–3% 3%–5% >5%

Source: Bloomberg Finance L.P. Data as of March 31, 2024. Equity risk premium represented by S&P 500 Sources: J.P. Morgan, Bureau of Labor Statistics, Bloomberg Finance L.P. Data as of March 31, 2024.
earnings yield minus 10yr U.S. Treasury yield.

When investors own large-cap equities, they own a stake in the future profits of On a sector basis, we focus on technology, consumer discretionary, healthcare
large-cap companies. Equity valuations should remain elevated so long as the and industrials. The tech sector has the best earnings growth prospects, with
outlook for profit growth and shareholder return remains as solid as it is today. mid-teens growth likely over the next several quarters relative to high single
digits for the broad market. The consumer sector should benefit from the end
In short, it looks to be a very attractive environment for equity investors. of the inventory overhang that developed as consumption shifted from goods
to services during the post-COVID reopening. Healthcare earnings growth is
Across global stock markets, we are positive on European equities, given the
swinging from -20% in 2023 to +8% this year, and the sector can access secular
global growth inflection. European companies are also exhibiting increasingly
trends such as weight loss drugs (GLP-1s).
shareholder-friendly practices, something they share with Japanese corporations
(we explore both trends in our Global Perspectives). Further, investors can find On the other hand, we want to continue to avoid companies with upcoming debt
opportunities in Mexico, given nearshoring trends, while Brazilian equities offer maturities (their shares have underperformed the market by 10% this year).
an interesting combination of stable economic fundamentals with discounted Similarly, we look to steer clear of unprofitable companies. In fact, stocks of
valuations: The MSCI Brazil Index currently trades at a 7.5x forward price-to- companies that aren’t expected to be profitable until after 2026 have fallen by an
earnings ratio. average of 28% so far this year.5

In the United States, high-single-digit earnings growth should push markets to We believe global equities should be able to power portfolios through higher
new highs through the end of 2024 and beyond. growth, inflation and interest rates through the second half of 2024.

5 David Kostin. U.S. Weekly Kickstart. Goldman Sachs, 2024.

21 STRONG ECONOMY

Cross-market opportunities Except for the office sector, vacancy rates look stable
CRE vacancy rate %, SA
25%
Higher rates can be tough for some businesses, households and asset classes. But
those stresses create investment opportunities—if you know where to look. The
Fed’s “higher for longer” stance has extended the opportunity we see in real estate, 20%
private equity, and U.S. small- and mid-cap equities. But it may only last until a
material rate-cutting cycle gets underway.
15%

Commercial real estate: Re-engaging with the asset class after a

10%
turbulent adjustment

While commercial real estate (CRE) was hit hard by COVID and the subsequent 5%
reset in interest rates, the damage to investor perceptions (exacerbated by
incomplete media coverage) of the asset class was likely worse.
0%
Higher rates weighed on valuations. Migration out of cities and the rise of '03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23

work-from-home challenged the viability of offices. The brief yet turbulent Industrial Apartment Central business district office Office suburban Retail
banking crisis that occurred in the spring of 2023 increased worries about credit Source: NCREIF. Data as of March 31, 2024.
availability.

In publicly traded equity markets, real estate has been the worst-performing Sector fundamentals remain supportive outside of office and multi-family
sector since the end of 2021, underperforming the rest of the market by 35%. Change in rental income per sq. ft. since 2022 Q4
At the same time, property prices, as measured by the National Council of Real 30%
Estate Investment Fiduciaries (NCREIF), are down between 10% and 20% from
24.8%
2022 peaks. 25%

20%
But we believe it is now time to allocate to the sector after a turbulent adjustment.
We point to a few key reasons:
15%

Most importantly, the fundamentals for real estate sectors outside of office remain
10% 8.7%
supportive. 6.2% 6.2%
5%
Vacancy rates in retail, apartments and industrial properties are all stable. Central
0.8% 0.7%
business district office vacancies are historically high but show tentative signs of 0%
stabilization. Interestingly, suburban office vacancies have outperformed their
-2.0%
downtown peers. -5%

Logistics LEED-certified office Warehouse Data center

Suburban office High-rise apartment Central business district office

Sources: CoStar, Goldman Sachs Investment Research. Data as of March 31, 2024.
22 STRONG ECONOMY

Credit conditions are also improving. The office sector is the only property type
with rising delinquency and special servicing rates. Trends in hospitality, retail,
multi-family and industrial are either stable or improving.

Surprisingly, bank commercial real estate loans outstanding have grown over
the last year, while primary issuance in commercial mortgage-backed securities
markets was 3x higher in Q1 2024 versus Q1 2023. These green shoots in financing
markets suggest that CRE will be able to muddle through the $1.5 trillion of
loans that mature over the next two years (assuming that rates are near the peak
for this cycle).

Finally, rent growth has been strong from the end of 2022. The only two property
types with negative rent growth are mid-rise apartments and central business
district offices. Logistics, data centers, warehouses, business travel–oriented hotels
and newly constructed LEED-certified office buildings have all been able to grow
rental incomes by greater than 5%.6

Real estate is not a monolith, and different sectors face very different headwinds
and tailwinds. Going forward, we are most interested in sectors that will benefit
from secular trends. Examples include data centers, student housing and logistics.
In particular, the housing sector should continue to benefit from a powerful secular
theme—a significant shortage of single- and multi-family homes. We estimate
the U.S. housing shortage at somewhere between 2 million and 2.5 million units.
That shortfall won’t disappear anytime soon, as higher rates have constrained new
construction and raised the cost of buying a home.

This environment supported the rental market, especially single-family rentals.

At the same time, new multi-family housing starts have fallen 33% from 2022
peaks, which should eventually support multi-family property prices as well.

Commercial real estate is at a turning point, in our view. Investors may find value
in the asset class, which can provide uncorrelated income and inflation hedge to
investment portfolios.

The estimated United States residential real estate shortage

is between 2 million and 2.5 million homes.

6 Lotfi Karoui. US CRE, one year later: Volatile, dispersed, but not systemic. Goldman Sachs, 2024.
23 STRONG ECONOMY

Private equity: Re-emerging after a challenging period Private equity exits are challenged by elevated interest rates
USD billlions
Like the real estate sector, the private equity industry is re-emerging after a $1,000
challenging period. Higher interest rates have hit the asset class on two fronts. First,
$900
debt, the key ingredient for leveraged buyout transactions, is at once costlier and
harder to acquire because demand for public leveraged loans has dried up. Second, $800

it has become more difficult to monetize investments. IPOs and private equity $700
exit transactions are down ~50% from 2021 peak levels. Another constraint: Some $600
potential sellers are reluctant to transact at valuations below the high-water marks
$500
from 2021.
$400
As a result, net cash flow for limited partner investors in private equity funds has $300
been negative for two years in a row for the first time since the global financial
$200
crisis. One risk for investors in existing private equity funds is that valuations could
be further pressured by higher interest rates, and distributions remain weak due to $100
tepid deal volume. $0
'08 '10 '12 '14 '16 '18 '20 '22
But we think some of the headwinds are starting to abate, creating an interesting
Corporate acquisition Public listing Secondary buyout
backdrop for new investment in the asset class. Higher public market equity
Sources: PitchBook, J.P. Morgan Asset Management. Data as of December 31, 2023.
valuations should lead to increased appetite for IPOs, while stability in interest
rates (and eventually rate cuts) should spur deal activity.
Secondary private equity funds have generated consistently strong returns
For now, we are focused on partnering with managers with a proven track record
Net IRRs by strategy, % (20-year investment horizons from 1978 to 2023)
of driving value through organic growth and operational efficiencies without an
over-reliance on leverage. We find the greatest range of opportunities investing 30%
in industries that benefit from secular trends. At the top of that list: technology,
25%
defense, healthcare and the energy transition.

So long as traditional private equity exits remain difficult to access, we would 20%
expect to see continued record deal flow in secondary private equity markets, where
15% 15.1% 14.5%
funds buy existing assets out of other private equity fund portfolios. Typically,
buyers of secondary private equity assets require a discount to the current holding 10.9% 11.3%
10% 9.9%
value of the asset in exchange for providing liquidity. Sellers have been willing to
accept discounts in exchange for the ability to raise capital for new investments. 5%
Secondary private equity deals also provide institutional investors with the
opportunity to rebalance their private investment portfolios on a more regular 0%
basis.
-5%
Secondary funds Buyout Fund of funds Growth equity Venture capital
What’s more, investors in secondary private equity funds can benefit from
buying assets that are “seasoned.” In other words, investors can expect to receive Median Upper quartile Lower quartile

distributions faster than they would from a traditional primary fund because Source: Cambridge Associates. Data as of 2023.
24 STRONG ECONOMY

investments are closer to “realization” (the end of the investment cycle). Finally, equity market that could grow to $1 trillion by 2025.7 Discounts in this space can
investors in secondary private equity funds can diversify across both initial be as large as 50%, and monetization is expected within two or three years.
investment years and managers. Historically, across the subsets of private
investment strategies, secondary private equity funds not only generated the For all these reasons, secondary private equity funds offer investors attractive
highest median net internal rates of return (IRRs) (15% over the last 20 years), potential returns. We think the benefits of secondary private equity investing—
but also the narrowest dispersion of outcomes between top- and bottom-quartile which are themselves the knock-on effects of a higher rate environment—can
managers. deliver potential returns that are more consistent than traditional private equity
returns and above public market equivalents for sophisticated investors that
In addition, we see a growing opportunity to acquire “legacy” assets out of funds understand the liquidity trade-offs.
that are more than 10 years old and winding down—a segment of the private

Quality small- and mid-cap stocks

Traditionally, small- and mid-cap (SMID) companies feel the sting of higher valued, high-quality SMID companies. We believe allocating around ~5%–10% of
interest rates more than their large-cap counterparts. As rates rose dramatically in an investor’s overall equity portfolio to SMID stocks, assuming appropriate time
2022, many smaller companies struggled. horizon and risk tolerance, can be be additive to risk-adjusted returns.

Today, U.S. small-cap companies dedicate over 30% of their EBITDA (earnings
before interest, taxes and amortization) to servicing debt, up from 20% before A near-record discount for small-cap stocks may offer an opening
central banks started raising rates. S&P 500 companies, in contrast, spend less
Top-quintile of free cash flow margins, forward P/E ratio relative to the same cohort in
than 10% of EBITDA on debt service. Not surprisingly, then, small-cap stocks large-cap stocks*
have underperformed large-cap stocks by over 15% (cumulatively) over the last
1.8x
two years.

While a valuation discount for indebted SMID stocks seems reasonable, today’s 1.6x
near-record discount between the highest-quality SMID stocks does not. This
discount persists even though the top tier of SMID companies (as measured by free 1.4x
cash flow margin) are competitive with their large-cap peers. As a result, this could
be an interesting entry point to build a portfolio of actively managed, attractively 1.2x

1.0x

In these three markets—real estate, private equity, SMID companies— 0.8x

the trajectory of interest rates will be key. If interest rates stay higher
for longer, it likely means continued stress. But the flipside of stress 0.6x

is opportunity. If inflation falls faster than expected, allowing for a

0.4x
material rate-cutting cycle, the opportunities may not last for long. '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
Source: Empirical Research Partners. Data as of April 30, 2024. *Note: Capitalization-weighted data,
small-capitalization stocks (ex-commodities & biotech).

7 Preqin. March 2023.

25 STRONG ECONOMY

The AI revolution
It’s just getting started

Artificial intelligence (AI) has already catalyzed a wave of excitement, investment potential jobs that could be displaced by AI. Using IMF assumptions about the
and earnings growth. We want to invest for the long term across the value chain. By duration and scale of job displacement, we can generate an upside estimate of the
the end of the 2020s, evidence of AI’s boost to productivity could start appearing in potential productivity boost from AI.8
the economic data. The productivity gains could be even greater than the combined
impact of the personal computer and the internet. 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
In his shareholder letter, our Chairman and CEO Jamie Dimon likened AI to the 18%, or $7 trillion beyond the current Congressional Budget Office (CBO) projection
steam engine, electricity and the personal computer. To understand how the AI for GDP. For reference, the cumulative productivity gain from the personal
revolution might play out, we considered those historical precedents. computer and the internet was just under 13% over a similar time horizon.

Productivity benefits don’t show up overnight. It took more than 60 years for the But what happens to the workers that are at risk of being replaced by AI? Though
steam engine to deliver any observable economy-wide productivity benefit. With job displacement may be acute for workers in specific industries and regions,
each subsequent technological innovation, the time to observe productivity growth overall technological improvements will likely create more jobs than it will destroy.
declines. If that pattern holds, we should expect to see AI’s benefits in the official
economic statistics by the end of the decade. The U.S. farm sector is a good example of shifting employment trends. In 1950,
nearly 15% of all jobs in the United States were related to farming. Today, that share
This means AI’s economic impact could be felt in half the time it took for the PC is less than 1.5%. It seems likely that the global workforce will adapt to changing
and internet to deliver economic benefits. sources of labor demand, and the companies that have a demonstrated ability to
retain and upskill existing employees should benefit.
How big a productivity boost might we see? To try to answer this question, we
modified an International Monetary Fund (IMF) framework that isolates the

8 To be specific, the IMF has calculated that about 30% of U.S. jobs are potentially vulnerable to AI displacement, falling into the category of “high exposure, low complementarity.” We assume that half of these jobs (15% of the
U.S. workforce) are displaced by AI over the next 20 years and that the pace of displacement follows a Sigmoid function (i.e., the classic “S curve”). In doing so, we are effectively shrinking the total hours worked in the economy
from this displacement, which results in a mechanical rise in labor productivity assuming output remains unchanged. Mauro Cazzaniga, Florence Jaumotte, Longji Li, Giovanni Melina, Augustus J. Panton, Carlo Pizzinelli, Emma
Rockall, and Marina M. Tavares, Gen-AI: Artificial Intelligence and the Future of Work, International Monetary Fund, January 2024.
26 STRONG ECONOMY

Even the optimists may underestimate the speed of AI’s productivity gains The CBO’s current projection could be misjudging AI’s potential productivity gains
Years from innovation to productivity growth Indexed at 100 for 2023, U.S. labor productivity
70 180
61
60
160
50

140
40
32
30 120

20
15 100
10 ~7

80
0
'23 '28 '33 '38 '43
Steam engine Electricity PCs/Internet AI
(1769) (1880) (1981) (2023) CBO baseline AI-induced potential upside

Sources: U.S. Census Bureau, Business Trends and Outlook Survey, J.P. Morgan. Data as of November 2023. Sources: IMF, J.P. Morgan. Data as of January 31, 2024. Note: CBO baseline calculated using real GDP projection
divided by number of hours worked. AI induced potential upside projected assuming 15% of jobs will be
replaced by AI in the next 20 years, which is half of what the IMF suggested in research.

Of course, these estimates are imprecise. The adoption of AI will face many Among publicly traded companies, the first round of winners are closely linked
headwinds, including concerns around the supply of advanced semiconductors, to semiconductor manufacturing and cloud computing—the digital and physical
legal and regulatory issues, potentially limited power and energy resources for infrastructure that powers AI technology. Nvidia, the leading producer of graphic
data centers, and the ability of firms to optimize potential use cases. Public policy processing units that power large language models, has seen its earnings rise more
focused on job training and transition for vulnerable workers will likely be needed than 400% since the end of 2021. Just two companies, Alphabet and Microsoft,
to mitigate the pain and upheaval from job displacement. Stakeholders will need increased capital expenditures by $10 billion in the first quarter of 2024, a
to evaluate the costs and benefits of sharply higher energy and water use required staggering three-quarters of the entire increase in S&P 500 capex.9
for AI computing. Finally, companies will have to balance new use cases for AI with
responsible governance. However, investors are starting to appreciate that this infrastructure buildout will
be relatively broad both because adoption will increase and because AI workloads
It may take some time for the benefits of AI to appear in traditional economic require substantially more energy than traditional computing. Estimates suggest
data. But we can see the AI revolution is already impacting corporate behavior, that using ChatGPT requires up to 10x more power than a traditional web search.
investment and earnings. Though less than 5% of U.S. firms are actively using AI Further, it seems likely that data centers will be the largest contributor to U.S.
(according to Census Bureau data), companies accounting for 50% of the S&P 500’s power demand growth through the end of this decade.
market cap have mentioned AI on earnings calls. Governments around the world
are also massive potential untapped users of AI applications.

9 Michael Goldstein. Capital Spending Growth Accelerates: An Early Warning Sign? Empirical Research Partners, 2024.
27 STRONG ECONOMY

Indeed, industrial production in electrical equipment has already surged back

to mid-2000s levels and seems set to rise further. So far in 2024, companies that
provide heating, cooling, electrical equipment and real estate for data centers have
outperformed.

Beyond the beneficiaries of the digital and physical infrastructure build-out, we

are focused on investing in companies that could benefit from either a boost to
productivity (from industries such as consumer goods, financials, transportation
and energy), a boost to revenue (software, robotics, applications) or both
(manufacturing, healthcare). The potential use cases for AI span across almost
every industry.

Firing on all cylinders: AI is likely to increase revenue sources, reduce time to market and lower costs
Sector applications of AI

Advertising & Retail & Energy & Business

Healthcare Financials Customer Service
Digital Content Freight Industrials Intelligence
Smart implants AI thematic 3D shopping Developer tools
Marketing efficiency AI tools for pipelines Customer analytics
(ex: hip & knee) fund offerings & product try on & assisted code

Sidewalk robots Insurance claims

Medical imaging New trade pricing tools Enhanced ad targeting Geological models AI-related consulting
for deliveries & records

Generate client AI-enabled Integrated smart

Pathology detection Recommendation engine Supply chain efficiency Transcribe & summarize
portfolio reviews microgrid tools home interface

Automated trade Automate back

Personalized medicine Higher ad conversion Inventory management Energy usage analytics Client onboarding
prices, execution office tasks

Energy trading Fraud prevention

Identify biomarkers AI portfolio management Ad auction dynamics Demand prediction
enhancements & protection

Cybersecurity
New drug development Increase trading velocity Content creation Truck routing capabilities Labor scheduling
capabilities

Customized travel Risk assessment

Analysis of genomic data Product cross-selling Higher fleet utilization Reservoir optimization
itineraries & management

Physician point of Autonomous fleet Leak detection

Video game development Accelerated data analysis
service tools networks & track emissions

Predictive modeling
Sources: J.P. Morgan, Morgan Stanley. Data as of March 31, 2024.
28 STRONG ECONOMY

In the private markets, we expect to find investment opportunities in younger

companies that are developing applications that will make AI technology useful
to businesses and consumers, or those that are innovating with “edge AI” where
computations take place at the source of the data (e.g., a smartphone, car, medical
device or industrial machine) rather than in the cloud. Many of these companies
probably don’t even exist yet.

We believe investors should approach the AI revolution with a patient, long-

term mindset, building exposure to potential beneficiaries across sectors and
geographies in the public and private spaces. It is difficult to overstate the potential
opportunity.

AI’s substantial and growing demand for power sources supports electrification
Electrical equipment production, indexed to 100 in 2017, 6-month moving average

155

145

135

125

115

105

95
'85 '86 '88 '90 '92 '94 '96 '97 '99 '01 '03 '05 '07 '08 '10 '12 '14 '16 '18 '19 '21 '23

Sources: Federal Reseve Board, Haver Analytics. Data as of April 30, 2024.
 A FRAGILE WORLD 29

A fragile
world
While our market and economic outlook
is constructive, we acknowledge two big
sources of uncertainty—the U.S. election
and geopolitical risk.
 A FRAGILE WORLD 30

U.S. election
It will likely be market friendly, but with higher personal tax rates over the medium term

For the first time since 1892, the two primary candidates in the upcoming markets higher, and the president had a relatively minor influence over market
presidential election have both been president and have both already campaigned returns. We expect more of the same for the next four years.
against one another. From an investor’s perspective, we’d point out that markets
performed well during both candidates’ terms in office. That said, each candidate is likely to enact very different policies in five critical
areas (taxes, tariffs, energy, healthcare and regulation). From a global market
From Donald Trump’s election in 2016 to election day 2020, U.S. large-cap equities perspective, the most important potential stance may be Trump’s floated proposal
delivered an annual return of 15.6% (versus a long-term average of nearly 9%). to tariff all goods imports at a rate of up to 10%.
From Joe Biden’s election in 2020 to today, U.S. large-cap equities posted a 12.4%
annual return. Those two periods had no shortage of policy, economic and social
uncertainty. But in the end, economic and earnings fundamentals drove equity
 A FRAGILE WORLD 31

U.S. election policy proposals—what might we expect?

Potential stances on key issues

Key issues Potential Biden stance Potential Trump stance

Possible partial extension of 2017 tax cuts. Greater chance of higher Aim to extend 2017 tax cuts with partial offsets from reduced
Taxes
taxes on wealthy individuals and corporations. government spending.

Tariffs Continuation of tough on China status quo. Intend to increase tariffs on trading partners, especially China.

Defense Likely steady emphasis on alliances and multilateralism. Potential push for more self-reliance from NATO members.

Aim to reduce emissions and increase energy efficiency. Raise Aim to increase traditional energy production by drilling on
Energy
taxes on the fossil fuel industry. federal land and extending pipelines.

Healthcare Aim to protect and build on Affordable Care Act. Aim to undo Affordable Care Act.

Regulation Heightened regulation of energy, technology and financial services. Aim to reduce regulation of energy and financial services.

Sources: Tax Foundation, J.P. Morgan. Views as of April 30, 2024.

 A FRAGILE WORLD 32

The markets that could be most

sensitive to political outcomes

Small- and mid- which would likely

welcome the prospect of
cap equities less onerous regulations

which would likely strengthen

The U.S. dollar if tariffs become more likely

Clean energy and which would likely react to the

potential for continued subsidies
traditional energy or increased oil production

We think a risk for investors is that neither candidate is likely to be fiscally Finally, if the Tax Cuts and Jobs Act (TCJA) expires after 2025 as scheduled (a possible
conservative. The U.S. federal debt and deficit picture will likely deteriorate scenario if leaders in Washington under split-party control cannot reach agreement),
further. This could increase bond market volatility in the near term. Over a longer the top-tier marginal tax rate will increase to 39.6% (from 37% today), and the
period, higher taxes will be needed to help reduce the federal debt burden. The lifetime estate and gift tax exemption will be cut in half to about $7 million per
U.S. federal debt is already 100% of GDP, and the CBO estimates that ratio will person ($13.61 million today).
soar to 120% in the next 10 years. U.S. government interest expense could rise
to $900 billion this year, or nearly 3% of GDP.10 At the same time, U.S. federal
government tax collections equal less than 30% of GDP, the lowest share among
the G-10 economies.

10 Alec Phillips, Tim Krupa. US Economics Analyst: The Fiscal Outlook: Not Good, But a Little Better. Goldman Sachs, 2024.
 A FRAGILE WORLD 33

Investor focus on tax efficiency

If higher U.S. tax rates seem inevitable (which they do), then U.S. investors should
place a premium on tax efficiency not only in their investment portfolios, but across
their entire balance sheets. We call this practice “tax-aware wealth management.”

U.S. taxpayers can keep more of what they earn in markets through asset location,
tax loss harvesting, smart withdrawals, integrated planning techniques and
sophisticated borrowing.

Turning first to asset location, we think U.S. taxpayers should focus on placing
tax-efficient assets such as equities, municipal bonds, preferred stock and private
equity in taxable accounts. Tax loss harvesting strategies can amplify after-tax
returns in taxable accounts. Tax “inefficient” assets that generate the bulk of their
return from interest income or short-term capital gains (think private credit, some
hedge funds and high yield bonds) would be best placed in tax-deferred accounts,
such as a IRAs or, potentially, low-cost variable annuities.

Being thoughtful about “where” to hold certain investments can add up to

substantial tax savings for investors.

Tax-aware wealth management includes a range of planning approaches that may

be even more powerful than asset location. Accelerating taxable income prior to the
expiration of the lower TCJA tax rates (think Roth conversions), could be a prudent
strategy depending on your situation. Donating long-term appreciated stocks to
charity provides a double tax benefit: avoiding any taxes on embedded gains and
offering a deduction to your other taxable income. For those with taxable estates,
gifting to your family through annual or lifetime exclusions can have a material
impact on an after-tax basis, as it moves future growth off your balance sheet.

Finally, borrowing can also act as a strategic lever to bridge lumpy cash flows
(avoiding taxable events and maintaining market exposure). Alternatively, if it is
structured properly, the interest paid on borrowing may serve as a deduction and
offset to taxable investment income.

In short: Don’t let the election derail your long-term plan.

Focus on what you can control.
 A FRAGILE WORLD 34

Geopolitics:
The risk is real—and so too is
the investment opportunity
Geopolitical events and market returns

First, investors should remember that geopolitical events very rarely leave a lasting
negative impact on U.S. large-cap equity markets (as research from our Chairman
of Market and Investment Strategy Michael Cembalest has shown).11 This is why
properly diversified long-term investment portfolios are typically well insulated
from destabilizing events, such as wars, invasions, terrorist attacks, coups,
referendums and assassinations of political leaders.

Geopolitics and the potential for

global conflict present the second
key risk to markets in the latter half
of 2024.

11 J.P. Morgan, Michael Cembalest, Eye on the Market, Nov. 14, 2023, Appendix.
 A FRAGILE WORLD 35

We examined 36 such events since the beginning of World War II. We found that For more tactical investors looking for a hedge, gold and crude oil stand out. These
six-month and 12-month forward returns after these events are identical to the assets tend to rally in the short-term window prior to and including a geopolitical
average returns during periods when there was no notable geopolitical event. event. Also, after the geopolitical event passes, these hedges tend to decline in value
as investors exhale and move back into risk assets.
That said, geopolitics can have profound market impacts at the local level. For
example, German small-cap equities have materially underperformed their German This pattern underscores the need to actively manage these exposures, which are
large-cap and global peers, largely because of Russia’s invasion of Ukraine and the often best expressed through options and other derivatives. In the near term, we see
subsequent disruption of energy supplies. very strong return prospects for gold. This reflects the commodity’s geopolitical
risk premium and demand from global central banks that want to diversify their
reserve holdings away from the U.S. dollar. Tactical investors should take note.
One takeaway: Investors who have concentrated
Markets will likely continue to be wary of further conflict, but we do not believe
exposure probably have more to fear from geopolitical these risks will derail our overall view. Diversification can help mitigate geopolitical
risks than investors in globally diversified portfolios. risk for most investors.

Large-cap equities have been insulated from shocks Geopolitical events can have acute local impacts
Average S&P return and geopolitical events, % Cumulative performance since January 2022, %

10% 10%

9%
0%
8%

7%
-10%
6%

5% -20%

4%
-30%
3%

2%
-40%
1%

0% -50%
3-month 6-month 12-month 2021 2022 2023

All time After events MSCI Germany Small Cap MSCI Germany MSCI World

Sources: S&P, Haver Analytics. Data as of December 31, 2023. Source: Bloomberg Finance L.P. Data as of April 30, 2024.
 A FRAGILE WORLD 36

Beyond acute geopolitical risk,

we do believe many large and
economically significant countries
will have a durable interest in
bolstering their national security
in three important areas:

01 Defense
02 Supply chains
03 Energy
These are long-term global trends that will require a strategic
approach from investors.
 A FRAGILE WORLD 37

Defense

U.S. defense spending as a share of GDP is at post-WWII lows despite the

inexorable rise in global conflict. Only 12 NATO countries are currently meeting
their obligations on defense spending; seven more are expected to increase their
spending this year. We believe this decades-long decline will likely reverse.

At the same time, governments, corporations and households need to protect

against cyber threats. Cybersecurity breaches now occur almost daily, and the
associated damages have risen with the frequency of attacks. The average cost
of a single data breach has climbed from $3.62 million in 2017 to $4.45 million
in 2023—a 23% increase. Governments and corporations will need to continue
to increase cybersecurity spending. While it already represents 12% of corporate
technology budgets, that share is likely to grow throughout the rest of the decade.

Geopolitical risks have catalyzed decade-long defense spending cycles

U.S. defense spending as a % of GDP

9%
Supply chains
8%
Cold War War on Terror
7% One could argue that the U.S.-China trade war that began in 2018 was the opening
salvo of a more concerted effort by policymakers to influence global trade and
6%
diversify sources of critical goods and materials away from China.
5%
During the pandemic, supply chain fragility challenged company operations and
4%
helped push inflation higher. Today, supply chains are considerably more resilient.
3% Some post-pandemic supply chain shifts have benefited countries such as Mexico,
2% Vietnam and India. Still, policymakers continue to focus on sources of supply for
goods that are critical to national security.
1%
Notably, China is still the largest source of U.S. advanced technology product
0%
'70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12 '15 '18 '21 imports at more than $165 billion annually. We continue to expect further trade
frictions around advanced technology products, which may result in broader tariffs
United States Europe
and further shifts at the expense of Chinese companies.
Sources: U.S. Congressional Budget Office, World Bank, Haver Analytics. Data as of December 2023.
In addition, governments will likely work to continue to incentivize domestic
production of products such as semiconductors and batteries. The Inflation
Reduction Act (IRA), designed for this purpose, has already sparked a surge in the
construction of manufacturing facilities in the United States.
 A FRAGILE WORLD 38

Energy

Russia’s invasion of Ukraine compromised European access to natural gas, and the
energy transition necessitates investment in domestic production of renewable
energy. We expect spending on clean energy technology to more than double by
2030, to $4.6 trillion. Energy infrastructure (e.g., power plants and energy storage)
and transportation (e.g., pipelines, liquified natural gas carriers) will continue to
pull in new investment.

This trend, in conjunction with the Inflation Reduction Act and AI revolution,
bodes well for domestic infrastructure, energy and power assets. Indeed, since
the IRA passed, announced investments in U.S. clean energy have reached $473
billion—representing about 152 new (or expanded) solar, wind and battery
manufacturing facilities.

As in AI, investing in these arenas will require a combination of public and private
equity allocations. As we’ve discussed, these are long-term strategic investment
trends requiring a patient commitment of capital.
 CONCLUSION

Geopolitical fragility,
economic strength.
Even as inflation remains sticky, other market and macroeconomic variables
across developed economies look remarkably solid. Companies have shrugged off
higher rates. Earnings are poised to grow. Labor markets find supply and demand
in a reasonable balance.

Markets will likely find renewed momentum in a robust global economy. We expect
global equities will drive portfolio returns through the rest of the year. And if
global growth stumbles, bonds can provide portfolio ballast. Investors should feel
confident that assets should be able to do their jobs for long-term, goals-based,
investment portfolios.

A strong economy in a fragile world. All in all, it’s a healthy backdrop for investors
as they prepare for the second half of 2024.
Global
Perspectives WE HIGHLIGHT THREE AREAS OF OPPORTUNITY FOR GLOBAL INVESTORS:

Companies are buying back stock,

01 the consumer is healthy—it’s a
new chapter for Corporate Europe.

02
Latin America supplies critical raw
materials for the energy and digital
transitions—and investors have
multiple ways to potentially benefit.

Amid an escape from deflation

03 and corporate reform, Japanese
equities offer a compelling
opportunity.

We believe the global equity rally will continue to broaden

through 2024, to new regions (beyond the United States) and
market caps (beyond the mega-cap darlings).
 GLOBAL PERSPECTIVES: EUROPE 41

Europe
Writing a new chapter for Corporate Europe
In the depths of the global financial crisis and the
sovereign debt crisis a few years later, many European
companies slashed their dividends. Shareholders
weren’t happy, but there was not much they could
do about it. Flash forward to early 2024. European
lenders and companies across sectors determined that
their balance sheets were strong enough to distribute
capital to shareholders.

Make no mistake: It’s a new chapter for Corporate

Europe. Companies have become far more
shareholder-friendly. The key evidence, even more
than rising dividends: Companies are buying back
their stock. Buybacks have long been a feature of U.S.
markets, bolstering U.S. equity outperformance over
the years. But the practice has traditionally been far
less common on the Continent. At the same time,
European net equity issuance has swung negative,
another boon to shareholders.
42 GLOBAL PERSPECTIVES: EUROPE

The trend toward shareholder-friendly corporate management—underappreciated Optimistic European equity forecasters have been burned in the past, of course, as
by market participants—joins forces with improving economic fundamentals in European stocks failed to live up to expectations. But we think European markets
the Eurozone. The consumer is healthy, bolstered by rising wages. The outlook for are at an inflection point, for structural and cyclical reasons. Shareholder-friendly
corporate profits is positive. Finally, interest rates look set to decline, providing a corporate management represents a major structural shift. And because cyclical
tailwind for consumers and businesses. By year-end, we will likely have seen more sectors dominate European markets, a pro-cyclical catalyst such as a rate cut could
rate cuts from the ECB than the Fed. spark new investor interest in the region.

It all adds up to a supportive environment for European equities. It also affirms

our view that the global equity rally will continue to broaden through 2024, to
new regions (beyond the United States) and market caps (beyond the mega-cap
darlings).

Structural shift: Shareholder-friendly corporates

One chart captures the essence of the structural change:

Breaking with tradition: Share buybacks are on the rise

Stoxx Europe 600 dividend yield and total cash return yield, % Stoxx Europe 600 net equity issuance, %
7% -4%
6%
5% -3%

4%
-2%
3%
2% -1%
1%
0% 0%
-1%
-2% 1%

-3%
2%
-4%
Companies buying
-5% back more shares 3%
-6%
-7% 4%
'06 '08 '10 '12 '14 '16 '18 '20 '22 '24
Dividend yield Total cash return yield Net equity issuance (RHS, inv.)

Sources: Datastream, Haver Analytics, Goldman Sachs Investment Research, J.P. Morgan. Data as of February 29, 2024.
43 GLOBAL PERSPECTIVES: EUROPE

For decades, European corporates struggled with anemic economic growth A global customer base powers Europe’s “National Champions”
and weak balance sheets, dependent on a fragile banking sector. Year after year, 2023 revenue exposure of Europe’s National Champions by region
companies issued equity as virtually back-to-back crises pummeled businesses
and markets. In response, many global investors pared their European exposures.
Europe
Often they didn’t look back.

But in more recent quarters, investors have come to appreciate the shareholder- Asia
friendly changes. (A similar shift is occurring in Japan, as we discuss in a
24%
companion Global Perspectives article.)
Americas 35%
From an investor’s point of view, a stock buyback signals corporate confidence, an
alignment of management and shareholder interests. Since buybacks reduce the
number of shares in the market, they create a more favorable balance of supply and 31%

demand for investors.

Rest of world
10%
Finally, we expect investors to increasingly recognize that leading European
companies, the region’s “national champions,” sell to a truly global consumer base.
They tend to benefit from a global economy that has weathered a higher interest
Sources: Company reports, Bloomberg Finance L.P., J.P. Morgan. Data as of December 31, 2023. Note: European
rate environment better than many had expected. We think the European economy
National Champions refers to Safran, Scheider Electric, LVMH, Hermes, Ferrari, Novo Nordisk and ASML.
will remain resilient over the coming year.
44 GLOBAL PERSPECTIVES: EUROPE

2 % Real wage growth of nearly

2% will bolster the economy
and corporate profits.

The economy is growing—and so are real wages

Across sectors and companies, improving economic fundamentals offer the

potential for stronger economic growth, and in turn, rising revenues and profits.

Eurozone GDP in Q1 expanded by 0.5% year-over-year, up from essentially zero

growth in 2H 2023. The composite euro area Purchasing Managers’ Index (PMI)
rose to 50.3 in March, the first time the survey has been in expansionary territory
since May 2023.12 We expect that Eurozone growth will accelerate toward 1% by the
end of 2024.

What’s more, real wage growth of nearly 2% will bolster the economy and corporate
profits. That’s up from -6% a year ago and nearly double the pre-pandemic average.

-6
Consumers have money to spend.

Finally, we note a fading drag from tighter financial and lending conditions. In
That’s up from -6% a year
ago and nearly double the
%
the latest ECB lending survey, the net number of banks reporting a tightening of pre-pandemic average.
lending standards fell to zero for the first time in four years.

We acknowledge risks to our outlook. Competition from Chinese manufacturers

poses a meaningful threat to European companies. Chinese electric vehicle
carmaker BYD, for example, could prove a tough rival to German auto
manufacturers.

12 S&P Global, Bloomberg Finance L.P. Data as of April 2024.

45 GLOBAL PERSPECTIVES: EUROPE

Then there are geopolitical risks. Russia’s invasion of Ukraine and subsequent
energy crisis heightened the risks of Europe’s dependence on energy imports.
Conflict in the Red Sea has strained shipping routes, increasing costs for energy
commodities.

Since the Middle East accounts for about a third of global oil production, escalating
tensions in the region could prove destabilizing. In particular, a disruption of oil
shipping in the critical Strait of Hormuz could push oil prices, and overall inflation,
higher. Concerns remain regarding the region’s ability to diversify energy supply
away from foreign oil, especially as European automakers struggle to sell electric
vehicles at a competitive price.

European growth fundamentals look poised to strengthen

Eurozone composite PMI future output index J.P. Morgan Euro area smoothed quarterly nowcast, %
75 3.5%

3.0%
70 2.5%

2.0%
65
1.5%

1.0%
60
0.5%

55 0.0%

-0.5%

50 -1.0%
Jun '21 Oct '21 Feb '22 Jun '22 Oct '22 Feb '23 Jun '23 Oct '23 Feb '24
Eurozone composite PMI future output (LHS) JPM Euro area smoothed quarterly nowcast (RHS)
Sources: J.P. Morgan, S&P Global, Bloomberg Finance L.P. Data as of April 2024. Note: J.P. Morgan smoothed
quarterly nowcast analyzes all macroeconomic data for a country to output an annualized quarterly GDP growth.

A broadening equity rally

For quite some time, investors have been well served by an overweight to U.S.
equities. We think that approach still makes sense over the long term. But especially
as the equity rally broadens to new regions, improving economic fundamentals and
shareholder-friendly corporate management in the Eurozone offer the potential for
attractive returns in 2024 and beyond. Investors will want to take notice.
 GLOBAL PERSPECTIVES: LATIN AMERICA 46

Latin
America
Strong demand, scarce supply: Unearthing
profits from critical raw materials

Electric vehicle (EV) owners know the drill—the

anxious search for a nearby charging station and
not much time to spare. They may also understand
that lithium, a key element in the manufacture of EV
batteries, has been in painfully short supply.

Here’s what is less well known: A wide range of raw

materials crucial to the energy and digital transitions
(including the rise of AI), and to security broadly
defined (national security, cybersecurity, energy
security), is concentrated in a handful of countries in
Latin America.
47 GLOBAL PERSPECTIVES: LATIN AMERICA

Chile and Peru produce 40% of the global copper supply,

while Chile and Argentina supply 32% of the world’s
lithium. Vital raw materials (notably copper, lithium,
cobalt and nickel) are in strong and growing demand, and
relatively short supply.

A few countries control a substantial share of key mineral reserves

Latin America’s share in the production and reserves of selected minerals, %

Silver

Copper

Lithium

Tin

Zinc

Nickel

Bauxite

Graphite

0% 10% 20% 30% 40% 50% 60% 70% 80%

Chile Peru Brazil Mexico Argentina China Share of global reserves

Sources: Mineral Commodity Summaries, U.S. Department of the Interior, U.S. Geological Survey.
Note: Numbers are estimates. Data as of December 31, 2022.

The investment implications of Latin America’s dominant role are far-reaching.

The opportunity set includes foreign direct investment in the region, the shares
of global mining giants and publicly listed companies that benefit from economic
activity in the region.

Latin America has long capitalized on its natural resources and mining accounts
for most of the major countries’ trade balances. We believe the secular opportunity
offered by the digital and energy transitions increases the potential for further
export growth.
48 GLOBAL PERSPECTIVES: LATIN AMERICA

Surging demand Tightening supply

Copper and lithium may be the two most important raw materials for these Surging demand will exacerbate an already tight mineral supply expected for the
transitions. Copper plays a key role in solar, hydro and wind energy systems. And coming decade.
in AI, it’s a game-changer: An AI data center requires three times as much power
as a traditional data center, according to a recent report by J.P. Morgan Investment For a variety of reasons (including a lack of infrastructure, greater demand for
Bank, and will thus need much more copper. Demand for lithium looks set to higher quality in refined products and political pushback to new projects), global
accelerate, given its essential function in batteries for EVs and energy storage production of several key minerals has grown at a relatively slow pace.
systems (8.9 kilograms—a significant amount—of the raw material makes its way
into the average EV).13 Growing demand for copper confronts limited supply
Global copper supply shortfall estimates, kt
By any measure, demand for key raw materials is accelerating at a rapid clip,
and the pace will only quicken with the digital and climate transitions. The 2,000

International Energy Agency (IEA) projects that electricity consumption from 272
data centers, AI and cryptocurrency could double by 2026. According to estimates 0
-45 -71 -244 -148
from J.P. Morgan Investment Bank, this growth rate could imply an additional 3%
-877
in copper requirements—in other words, a 3% increase beyond what is factored -2,000 -1,414
into current demand expectations.
-2,837
The energy agency also calculates that in a net-zero scenario, lithium demand -4,000
-4,074
would be expected to reach 717 kilotons (kt) by 2030 versus supply of a mere 485kt.
-5,190
-6,000
Prices look set to rise. BloombergNEF estimates that copper prices could jump -5,978
20% by 2027. Fortune Business Insights estimates that the global lithium market, -6,977
valued at $22.2 billion in 2023, is anticipated to grow to $26.9 billion in 2024 and -8,000
-8,194
$134 billion by 2032.
-9,150
-10,000
'22 '23 '24 '25 '26 '27 '28 '29 '30 '31 '32 '33 '34 '35

Sources: J.P. Morgan, CRU, Wood Mackenzie, BGRIMM, World Bank, OECD, Bloomberg New Energy Finance,
Auto manufacturer guidance, governmental agencies, IA. Analysis as of April 20, 2024.

13 IEA. Data as of March 2024.

49 GLOBAL PERSPECTIVES: LATIN AMERICA

Spotlight on security Investment implications

The gap between supply and demand of key raw materials exacerbates security The global mining sector presents perhaps the most direct way to access raw
concerns for both public policymakers and corporate executives. For example, materials critical to the energy, digital and security transitions. We think market
of the 50 minerals identified as critical by the Department of Interior’s U.S. participants may underestimate the sustainability of mining company earnings
Geological Survey, the United States is 100% reliant on imports for 12 of them. It and cash flows.
is 50% reliant for the next 29. As of 2023, the United States sourced the majority of
As a cyclical sector, mining could benefit from a recovery in global manufacturing
these minerals from China.
as well as any stabilization in the Chinese economy. And on the manufacturing
Procuring a secure supply of lithium is now a top concern for technology front, some mining companies have made headway in lowering their carbon
companies and vehicle manufacturers across Asia, Europe and the United States. emissions and managing water scarcity risks in Latin American countries.
One result: Strategic alliances and joint ventures have been made between
For global investors, Latin America’s equity markets currently offer solid earnings
manufacturers (mineral consumers) and mining companies to ensure makers have
and attractive valuations, both relative to global peers and their own histories. Latin
a reliable and diversified base of suppliers.
American stocks trade at a 9x 12-month forward P/E versus a 10-year average of
Unlike Russia, say, another major source of raw materials for the energy and 12x. Latin America now ranks as the world’s least expensive equity region.14
digital transitions, Latin America is seen as “friendly” territory to Western buyers.
Latin American equities may also enjoy the tailwind that comes from falling
Moreover, incentives under the U.S. Inflation Reduction Act (IRA) encourage interest rates. Central banks in Latin America have already cut policy rates nearly
manufacturers to source critical materials and/or assemble components in North 200 bps on average, leaving an additional 300 bps in potential cuts through 2024
America (which includes Mexico) or free trade partners. According to the Mexican and 2025.
Automotive Industry Association, the number of Mexico-made EVs exported to
In addition, increasing exports could spur economic growth in the region and help
the United States each year has nearly doubled from 2021 to 2023, as automakers
boost profits for Latin American companies.
leverage partial tax credits from the IRA when these vehicles are sold in the
United States. Investors may choose to focus specifically on the global mining sector, or more
broadly across capital markets. With either approach, they can find a wide range of
opportunities to benefit from Latin America’s role supplying critical raw materials
for the energy and digital transitions.
14 Bloomberg Finance L.P. Data as of May 20, 2024.
 GLOBAL PERSPECTIVES: ASIA 50

Asia
Japanese stocks: This time is different

Many investors thought the day would never come.

But after decades of economic malaise, Japan is finally
escaping its deflationary spiral as inflation and
nominal economic growth move higher. At the same
time, corporate reforms are forcing a fundamental
change in how companies treat shareholders.
Compelled by new regulations to focus on improving
efficiency and profitability, companies seem to be
returning more value to shareholders than ever before.

The macro backdrop is compelling. As China’s

economy continues to face headwinds and the broader
geopolitical backdrop looks increasingly fraught,
Japan stands out as an island of relative stability.
In Asia, it is among the economies least reliant
on Chinese demand, its economic conditions are
improving, and policy is supportive.
51 GLOBAL PERSPECTIVES: ASIA

Structural shifts in corporate governance combined with a positive macro outlook Welcoming inflation
are making Japanese equities among the most interesting investment opportunities
globally. Investors have taken notice. In 2023, the Nikkei Index gained 30% in local Japan is on the cusp of defeating what had seemed an entrenched deflationary
currency terms, beating the S&P 500 and finally surpassing Japan’s 1989 bubble spiral. That’s no small achievement: Deflation can have a pernicious grip on an
high. Factoring in currency depreciation, Japanese equities still returned 22% in economy. As businesses and consumers expect prices to fall, they put off spending,
U.S. dollar terms.15 and economic activity continues to weaken. This was essentially Japan’s fate for two
decades.
And yet on a relative basis, global investors still barely own Japanese stocks. With
estimates at about 4% of global equity portfolios, global investors are underweight Then prices took off amid COVID-related shortages, and activity reignited when
Japan relative to its weight in global equity benchmarks such as the MSCI World the Japanese economy reopened. And in Japan, inflation is a breath of fresh air—a
Index. We think this underweight positioning could soon close. welcome sign that the economy is normalizing at long last.

Here are three key reasons investors may want to consider boosting their allocation
to Japanese stocks.

Japan’s inflation signals an economy normalizing at long last

Japan Core CPI, year-on-year, %
4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

-3.0%
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24

Core CPI Inflation target

Sources: Ministry of Internal Affairs and Communications, Haver Analytics. Data as of April 2024.

15 Bloomberg Finance L.P. Data as of December 31, 2023.

52 GLOBAL PERSPECTIVES: ASIA

Economic normalization is driving a virtuous cycle of rising profits, wages,

property prices, and, importantly, consumer and market confidence. As higher
prices feed into stronger revenues, which in turn leads to higher wages, this
virtuous cycle can reverse decades of stagnation.

One example of this structural shift: Japan’s nominal growth outpaced China’s for
the first time in over 30 years.

Going forward, as Japan’s economy normalizes and China’s enters a period of

structurally weaker growth and inflation, the growth gap between the two Asian
giants can shrink.

For the first time in over 30 years, Japan’s nominal growth outpaced China
Nominal GDP growth, year-on-year, %

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24

Japan China

Sources: Cabinet Office of Japan, China National Bureau of Statistics, Haver Analytics. Data as of Q1 2024.
53 GLOBAL PERSPECTIVES: ASIA

A new era in corporate governance

In Japan’s capital markets, a major shift is underway. Reforms implemented by the earnings lag economic growth, often by a considerable distance. Companies may
Tokyo Stock Exchange (TSE) have pushed Japanese companies to change the basic dilute shareholder value by issuing more shares, increasing wasteful spending
relationship between corporations and their shareholders. The goal: to improve or otherwise making business decisions that erode per share profits. As a result,
corporate governance and ultimately shareholder returns. shareholder returns in many emerging market economies have underperformed
their developed market counterparts despite years of high economic growth.
Just as the shift from deflation to reflation can have a profound impact on the
economy, reforms aimed at improving corporate governance can have a profound
impact on shareholder returns. Consider the relationship between economic growth
and corporate earnings. In many economies with weak corporate governance,

Equity investors need to consider the relationship between economic growth and corporate earnings
Annualized nominal GDP growth vs. local equity index price returns, local currency, %, 2009–2023

0.12%
Developed markets Emerging markets
0.1%

0.08%

0.06%

0.04%

0.02%

0%

-0.02%
Japan United States Brazil Mexico Korea Malaysia Singapore China Hong Kong

Nominal GDP Equity returns

Sources: National sources, Bloomberg Finance L.P., Haver Analytics. Data as of Q4 2023.
54 GLOBAL PERSPECTIVES: ASIA

American corporates serve as a useful example. The U.S. economy has grown
more slowly than many other major economies over the past decade. Yet corporate
earnings (and thus returns) have outpaced economic growth by a wide margin.
A key reason (of course, there are notable exceptions) is that U.S. companies aim
to create economic value and to then return that value to shareholders. Corporate
governance largely explains why shareholder returns of U.S. companies have far
outpaced returns of companies in faster-growing economies.

Japanese companies are now moving closer to the U.S. model. Reforms implemented
by the TSE are changing the governance culture and forcing Japanese companies
to focus more on profitability. The result: Earnings for Japanese companies, which
have already outperformed the underlying economy, are expected to improve even
further and lead the developed world at about 11%–13% this year. This suggests the
potential for a meaningful upside on Japanese stock prices.

Supply chains and geopolitics

Japan is in a unique position in Asia. It is:

• Among the economies least reliant on Chinese demand

• An important player in the semiconductor supply chain

• A beneficiary as foreign companies seek to build supply chain resiliency

Japan budgeted ¥4 trillion for semiconductor and digital industry investments

over 2021–23 per the Japanese Ministry of Finance, a larger share of GDP when
compared with U.S. efforts to build out its own domestic supply of semiconductors. Conclusion

Semiconductor manufacturer TSMC is a good example of the supply chain story. Despite the recent rally in Japanese equities, we think transformational shifts across
As the company looks to diversify its manufacturing out of Taiwan, it announced Japan’s economy and markets can continue creating opportunities for investors. In
plans to build a plant in the United States. While the project has been beset with our view, share prices do not yet fully reflect the market’s full potential. Although
delays, TSMC has built and is now fully operating a new facility in Japan. This Japanese stocks have been trading in the midrange of their valuations over the
success has led it to unveil plans for further expansion in Japan. past 15 years, global positioning remains underweight Japanese equities. We think
multiples could move higher as global investors come to appreciate the structural
On the geopolitical front, Japan looks well positioned to manage some of the shifts underway.
gathering storms. Given the risk of rising trade frictions under a new U.S.
administration, Japan’s role as a U.S. ally and its crucial role in the global supply Optimistic forecasts have faltered in the past. We acknowledge the risk that
chain, we think Japan can chart a clear economic path. We note, however, that Japan Japan’s virtuous economic cycle could stall before it takes off. But after decades of
relies on imports for the vast majority of its energy, which could prove a challenge economic malaise and markets that went largely ignored by global investors, we
if oil prices spike. think the outlook is bright. Now is the time to revisit the investment case for Japan.
 TEAM 55

Our mission EXECUTIVE SPONSORS GLOBAL INVESTMENT STRATEGY GROUP

Clay Erwin Elyse Ausenbaugh

The Global Investment Strategy Group provides Global Head of Investments Sales & Trading Global Investment Strategist

industry-leading insights and investment advice to Russell Budnick Christopher Baggini

help our clients achieve their long-term goals. They Global Head of Market Strategy and Trading Global Head of Equity Strategy

draw on the extensive knowledge and experience Grace Peters Nur Cristiani
Global Head of Investment Strategy Head of LatAm Investment Strategy
of the Group’s economists, investment strategists
and asset-class strategists to provide a unique Madison Faller
Head of Market Intelligence
perspective across the global financial markets.
Aaron Goldstein
Head of Digital Investment Strategy

Stephen Jury
Global Commodity Strategist

Tom Kennedy
Chief Investment Strategist

Jacob Manoukian
Head of U.S. Investment Strategy

Kristin Kallergis Rowland

Global Head of Alternative Investments

Joe Seydl
Senior Markets Economist

Xavier Vegas
Global Head of Credit Strategy

Alex Wolf
Head of Asia Investment Strategy

Erik Wytenus
Head of EMEA Investment Strategy

Samuel Zief
There can be no assurance that any or all of the members will remain with the firm or that Head of Global FX Strategy
past performance or success of any such professional serves as an indicator of future success.
 56
IMPORTANT INFORMATION The MSCI Germany Index is a free-float weighted equity index. It was developed with a base
value of 100 as of December 31, 1998.
All market and economic data as of May 2024 and sourced from Bloomberg Finance L.P. and
FactSet unless otherwise stated. The MSCI World Index is a free-float adjusted SPX market capitalization-weighted index that is
designed to measure the equity market performance of developed markets. The index consists of
The information presented is not intended to be making value judgments on the preferred 23 Developed Market country indexes.
outcome of any government decision or political election.
The Nikkei 225 Index comprises 225 stocks selected from domestic common stocks in the
All companies referenced are shown for illustrative purposes only, and are not intended as a first section of the Tokyo Stock Exchange, excluding ETFs, REITs, preferred equity contribution
recommendation or endorsement by J.P. Morgan in this context. securities, tracking stocks (on subsidiary dividend), etc., other than common stocks.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves
This material has been prepared for informational purposes only, and is not intended to provide, as the foundation for a wide range of investment products. The index includes 500 leading
and should not be relied on for, tax, legal and accounting advice. You should consult your own tax, companies and captures approximately 80% coverage of available market capitalization.
legal and accounting advisors before engaging in any financial transaction.

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CMBS (agency and non-agency). of risk than traditional investments, including limited liquidity and limited transparency among
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market. The index has four main sectors: state and local general obligation bonds, revenue bonds,
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reading means that data releases have been worse than expected. 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
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid complex tax structures and delays in distributing important tax information. These investments
by urban consumers for a market basket of consumer goods and services. 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
Core PCE is a measure of prices that people living in the United States, or those buying on their and/or operation of any such fund. For complete information, please refer to the applicable
behalf, pay for goods and services. Food and energy are left out to make underlying inflation offering memorandum. Securities are made available through J.P. Morgan Securities LLC,
easier to see, due to their common price swings. Member FINRA, and SIPC, and its broker-dealer affiliates.
The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers Investments in commodities may have greater volatility than investments in traditional
over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the securities. The value of commodities may be affected by changes in overall market movements,
effects of workers moving between occupations and industries, and includes both the cost of commodity index volatility, changes in interest rates, or factors affecting a particular industry
wages and salaries and the cost of benefits. or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and
international economic, political and regulatory developments. Investing in commodities creates
The MSCI Brazil Index is designed to measure the performance of the large- and mid-cap
an opportunity for increased return but, at the same time, creates the possibility for greater loss.
segments of the Brazilian market.
Bonds are subject to interest rate risk, credit and default risk of the issuer. Bond prices generally
The MSCI Developed Markets Small Cap Indices offer an exhaustive representation of this size
fall when interest rates rise.
segment by targeting companies that are in the Investable Market Index but not in the Standard
Index in a particular developed market. The indices include Value and Growth style indices and Investors should understand the potential tax liabilities surrounding a municipal bond purchase.
industry indices based on the Global Industry Classification Standard (GICS®). 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
The MSCI EM Latin America Index is a free-float weighted equity index. It was developed with a
municipal bond funds may be subject to state and local taxation and the Alternative Minimum
base value of 100 as of December 31, 1987.
Tax (AMT).
 57

Preferred investments share characteristics of both stocks and bonds. Preferred securities are NON-RELIANCE
typically long dated securities with call protection that fall in between debt and equity in the capital
structure. Preferred securities carry various risks and considerations which include: concentration Certain information contained in this material is believed to be reliable; however, JPM does not
risk; interest rate risk; lower credit ratings than individual bonds; a lower claim to assets than a represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or
firm’s individual bonds; higher yields due to these risk characteristics; and “callable” implications damage (whether direct or indirect) arising out of the use of all or any part of this material.
meaning the issuing company may redeem the stock at a certain price after a certain date.
No representation or warranty should be made with regard to any computations, graphs, tables,
Small-capitalization companies typically carry more risk than well-established “blue-chip” diagrams or commentary in this material, which are provided for illustration/ reference purposes
companies since smaller companies can carry a higher degree of market volatility than most large- only. The views, opinions, estimates and strategies expressed in this material constitute our
cap and/or blue-chip companies. judgment based on current market conditions and are subject to change without notice. JPM
assumes no duty to update any information in this material in the event that such information
International investments may not be suitable for all investors. International investing involves a changes. Views, opinions, estimates and strategies expressed herein may differ from those
greater degree of risk and increased volatility. Changes in currency exchange rates and differences expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this
in accounting and taxation policies outside the United States can raise or lower returns. Some material should not be regarded as a research report. Any projected results and risks are based
overseas markets may not be as politically and economically stable as the United States and other solely on hypothetical examples cited, and actual results and risks will vary depending on specific
nations. Investments in international markets can be more volatile. circumstances. Forward-looking statements should not be considered as guarantees or predictions
of future events.
Derivatives may be riskier than other types of investments because they may be more sensitive to
changes in economic or market conditions than other types of investments and could result in losses Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory
that significantly exceed the original investment. The use of derivatives may not be successful, relationship with, you or any third party. Nothing in this document shall be regarded as an offer,
resulting in investment losses, and the cost of such strategies may reduce investment returns. solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by
J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication
Tax loss harvesting may not be appropriate for everyone. If you do not expect to realize net capital was given at your request.
gains this year, have net capital loss carryforwards, are concerned about deviation from your model
investment portfolio, and/or are subject to low income tax rates or invest through a tax-deferred J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You
account, tax loss harvesting may not be optimal for your account. You should discuss these matters should consult your own tax, legal and accounting advisors before engaging in any financial
with your investment and tax advisors. transactions. expressed by other areas of JPM, views expressed for other purposes or in other
contexts, and this material should not be regarded as a research report. Any projected results
This material is for informational purposes only, and may inform you of certain products and and risks are based solely on hypothetical examples cited, and actual results and risks will vary
services offered by private banking businesses, part of JPMorgan Chase & Co. (“JPM”). Products and depending on specific circumstances. Forward-looking statements should not be considered as
services described, as well as associated fees, charges and interest rates, are subject to change in guarantees or predictions of future events.
accordance with the applicable account agreements and may differ among geographic locations.
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GENERAL RISKS & CONSIDERATIONS “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our
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Any views, strategies or products discussed in this material may not be appropriate for all extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an
individuals and are subject to risks. Investors may get back less than they invested, and past investment product, such as a mutual fund, structured product, separately managed account or
performance is not a reliable indicator of future results. Asset allocation/diversification does not hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan
guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade
for the purpose of making an investment decision. You are urged to consider carefully whether the execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of
services, products, asset classes (e.g., equities, fixed income, alternative investments, commodities, purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment
etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, for providing services (including shareholder servicing, recordkeeping or custody) with respect
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goals/situation, contact your J.P. Morgan team.
Investment strategies are selected from both J.P. Morgan and third-party asset managers and
are subject to a review process by our manager research teams. From this pool of strategies, our
portfolio construction teams select those strategies we believe fit our asset allocation goals and
forward-looking views in order to meet the portfolio’s investment objective.
 58

As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of by J.P. Morgan SE—Amsterdam Branch, with registered office at World Trade Centre, Tower B,
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 59

and advisory services and discretionary investment management services are provided to you This material has not been prepared specifically for Australian investors. It:
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