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JPMorgan American Investment Trust plc | JAM

US equities, hand-picked by experts

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The US stock market is being supported by better-than-expected company profits, a pick-up in economic growth and prospects for interest rate cuts later in the year. Nevertheless, we believe it is important to stay mindful of the risks, using an active investment approach to tap into higher quality opportunities created by the current wide dispersion in valuation and performance across sectors.

The outlook for US stocks remains constructive

US stocks recorded a strong first quarter of 2024, with the S&P 500 index registering price gains of over 10% and 22 record highs in the three months to 31 March 20241. For investors that have so far stayed on the sidelines, many could be wondering if they have missed an attractive opportunity. Others may question if the rally is sustainable. In our view, we believe US stocks are in a sweet spot, supported by historical performance signals, a positive economic backdrop and robust corporate earnings growth.

1. History suggests strength leads to more strength

Historical data suggests that there is no clear advantage or disadvantage of investing in US stocks at record highs relative to any other time. Since 1970, the average 12-month price return of the S&P 500 index after reaching an all-time high has been 9.1%, while the average price return from investing on all other days stands at 8.7%2.

2. Positive economic backdrop

The outlook for the US economy remains constructive. Despite fears of recession amid a sharp rise in interest rates and a short-lived regional banking crisis, the US economy still grew by more than 3% in the fourth quarter of 20233. Crucially, the US consumer has remained resilient, supported by record low unemployment and higher real wage growth as inflation has cooled. The wealth effect from rising asset prices, such as equities and housing, could continue to support consumer spending as wealthier consumers tend to save less and spend more. With consumption accounting for around 70% of US gross domestic product (GDP)4, a resilient consumer presents a solid foundation for continued economic growth, albeit probably at a slower pace from last year.

Potential interest rate cuts later in the year could provide some additional tailwinds. although policymakers have recently trimmed rate cut projections for 2024 and 20255. Nevertheless, the avoidance of recession and a pick-up in economic activity, coupled with the potential for some monetary easing later this year, could present a constructive backdrop for US equities. In the 44 years since 1980, there have been 14 non-recession years when the Federal Reserve has cut interest rates at least once2. Price returns for the S&P 500 index were positive for 13 of those 14 years – or 93% of the time – with an average price gain of 15.6%2.

3. Corporate earnings paint a positive picture

The S&P 500 index is expected to record earnings-per-share growth of around 11%6 this year, which represents a clear acceleration from 2023’s more muted performance. Ebbing recession risks, moderating inflation and potential interest rate cuts could buoy earnings growth and, by extension, broaden equity returns following the technology-dominated rally in 2023 on the back of optimism about generative artificial intelligence (AI). A broader and more inclusive rally that covers a meaningful share of companies beyond just the largest tech names could lead to healthier and more sustainable gains for US stocks.

Take account of the risks with an active approach

While the backdrop for US equities appears constructive, investors should bear in mind the downside risks presented by a slowing global economy, a presidential election cycle, elevated geopolitical and supply chain risks, moderating but stickier inflation, and the economic impact of prolonged higher interest rates. These factors could trigger periodic bouts of volatility in the US equity market.

At the same time, not all companies are created equal, and the risks facing different sectors and industries could vary widely. Investors therefore should look to stay selective and discerning, with a focus on quality assets with sound fundamentals.

A rigorous, bottom-up, stock selection approach could be useful to separate the wheat from the chaff. Position sizing and active allocation will also matter to optimise longer-term outcomes as investment prospects can change quickly in fast-moving markets.

JPMorgan American Investment Trust | JAM

JAM employs a flexible, bottom-up approach to seek out high conviction growth and value ideas in a portfolio of approximately 40 stocks7. The portfolio’s value ideas are focused on quality franchises that exhibit consistent and sustainable cash flows, while growth ideas are focused on companies with robust yet underappreciated growth potential.

By combining these complementary investment styles – namely value and growth – JAM has the flexibility to seek out attractive opportunities from an expanded universe of US stocks that stretch well beyond the S&P 500 index7.

1. Source: Bloomberg, J.P. Morgan Asset Management. Data as of 31.03.2024.
2. Source: J.P. Morgan Asset Management. “Should investors be bullish or bearish on US equities?” Published 09.02.2024.
3. Source: US Bureau of Economic Analysis, J.P. Morgan Asset Management. Data as of 31.01.2024.
4. Source: US Bureau of Economic Analysis, FactSet, J.P. Morgan Asset Management. “Guide to the Markets (US) 2Q 2024”. Data as of 31.03.2024.
5. Source: Federal Reserve. “Summary of Economic Projections”. Published 20.03.2024.
6. Source: Compustat, FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Data as of 31.03.2024. Historical EPS levels are based on annual pro-forma earnings per share. 2024F and 2025F EPS growth are based on consensus analyst estimates for each calendar year.
7. Please refer to the fund’s offering documents for further details on its objectives. The manager seeks to achieve its stated objectives and there is no guarantee they will be met. Actual account allocations and characteristics may differ. Holdings, duration, allocations or exposure in actively portfolio managed portfolios are subject to change from time to time. Investments involve risks. Not all investments, strategies or ideas are suitable for all investors. Investors should make their own evaluation or seek independent advice and review offering documents carefully prior to making any investment.