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An interview with the chief global strategist at J.P. Morgan Asset Management.

What’s your stock market outlook for the second half? It’s a particularly challenging year, but I’m reasonably optimistic. The major concerns this year have been about inflation, the Federal Reserve raising rates very rapidly and the possibility of recession. We don’t know about geopolitical events, whether in Ukraine or other situations that will flare up. But I think economic growth can moderate without going into recession, I think inflation can moderate, and I think the Federal Reserve will cool its tone. That should make it a reasonably positive second half for U.S. stocks.

What’s your forecast for the economy and inflation? By the fourth quarter, I expect economic growth, adjusted for inflation, of less than 2.5% year-over-year; by the fourth quarter of next year, less than 2.0%. So I think the economy will grow, but at a much slower pace. On inflation, we expect the consumer price index to be back to 4.3% by the end of this year, 3.5% by the end of next year. Why do I think inflation is going to come down? Because there really is such a thing as transitory inflation. It was caused by the pandemic and the policy response. The pandemic is fading, and supply chains will improve. A lot of the money poured into the economy in terms of fiscal stimulus over the past two years is drying up. That money pushed up demand for a lot of goods. With less demand, inflation will naturally fade.

Why are you convinced we’ll skirt a recession? Despite the two extraordinary recessions we’ve seen since the start of the century—the pandemic recession and the great financial crisis—I think the volatility of GDP has fallen. It’s quite difficult to get a normal recession going. There’s a huge excess demand for labor, and that momentum will keep the economy out of recession. The unemployment rate will drift down to 3.3% by the fourth quarter of this year, which will be the lowest in 70 years, and to about 3.1% by the fourth quarter of next year.

Are U.S. corporate profits in good shape? It is tougher for corporations in general. It looks like operating earnings will be up about 7% to 8% in the first quarter compared to the same period last year. That’s representative of what we’ll see this year. We saw huge gains in earnings last year. Profits are extremely high, but it’s very hard to grow them from here. And companies are facing pressures. A rising dollar hurts the value of overseas earnings. Also, you’ve got rising wage costs, rising interest costs. So earnings overall will be growing more slowly. But within the market there are stocks that are cheap relative to earnings and others that are expensive. Looking at valuations is going to be much more important in the second half of this year and beyond. Investors will be a little more parsimonious about what they buy. But within the market there are plenty of opportunities.

How should investors position their portfolios? The first thing investors should do is look in the mirror. We had huge gains over the past three years. If you didn’t rebalance, the good news is that you’ve got a lot more money. The bad news is that you’re heavily overweight in large-cap growth stocks. Is that where you want to be? People have to look at how the environment has changed and make sure their portfolios are aligned appropriately in terms of risk and expected return. How much risk do you want to take?

In terms of where the opportunities are, valuations give you the answer. Value-priced stocks in general are selling at a steep discount to growth-oriented stocks. Over the past 25 years, the price-earnings ratio on value stocks has averaged 72% of that on growth stocks . Now it’s averaging 60%. People have been piling into mega-cap growth stocks. But the more sober world of 2022 and possibly 2023 will cause those valuation gaps to narrow. Similarly, international stocks in general have rarely looked as cheap as they do today compared with U.S. stocks. A lot of people are very underweight in international stocks—this is a good time to load up. You can get double the dividend yield you can get in the U.S., and you’re buying at much better valuations.

When you talk about international investing, where do you mean? Both Europe and China. Europe is cheap. It’s threatened by what’s going […]

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