JPMorgan Private Bank’s Got Deja Vu

• JPMorgan Private Bank sees the current investment scene as vaguely reminiscent of the 1990s, a comparison it’s using to guide its midyear outlook.

• The global wealth manager says it’s still optimistic about stocks, which it continues to see as a solid hedge against inflation. It’s got a particular affinity for US stocks and the AI revolution, but it sees the stock rally broadening to Europe where a growing recovery and improved shareholder returns are starting to make some noise.

• Like most pros, the firm was wrong in its expectations that inflation and interest rates would fall, but it maintains that interest rates will be higher for longer – but not forever.

JPMorgan Private Bank has seen this film before. The sense of deja vu it gets when it looks at the investment scene has helped it nail the important calls all year – and has been guiding its midyear outlook too. Here’s where the global wealth giant sees the best opportunities now.

Here’s the bigger picture.

In a lot of ways, the current situation resembles that of the 1990s, when interest rates were high and stable, and both shorter-dated and longer-dated bonds had similar yields. Like now, strong growth in productivity and investment were pushing stock prices upward. And that makes sense: valuations for stocks tend to remain well supported when growth and inflation are higher, as companies can raise their prices and still keep their costs under control. So, all of that is likely to help maintain near-record profit margins in developed economies.

Profit margins in the US (purple line) and in other developed markets (excluding the US). Source: JPMorgan Private Bank.

In the US this year, higher profit margins have helped boost companies' return on equity (ROE), a measure of how efficiently firms generate income for shareholders. ROE recently reached 19%, far above the long-term average of 14%.

What’s more, stocks have proved to be a good hedge against inflation, returning an average of nearly 15% per year when inflation runs between 2% and 3%. And even when inflation runs a bit hotter – between 3% and 4% – stocks deliver average annual returns above 8%.

S&P 500 Index annual performance in different inflation scenarios (1950–2024). Source: JPMorgan Private Bank.

And though the firm sees a strong global economy ahead, it acknowledges that geopolitical tensions are still a risk – its outlook is aptly titled “A Strong Economy In A Fragile World”. Nonetheless, it recommends that investors remain fully invested, with a globally diversified portfolio to reduce the potential impact of those risks. Stocks have rallied around 10% already this year, boosted by strong earnings growth and rapidly strengthening AI tailwinds. And the private bank sees a potential double-digit upside for the world’s stocks over the next year.

1. US and global stocks.

The private bank has been encouraging investors to maintain an overweight position in US stocks – meaning, more than the 60% it would get as part of a global benchmark based on market size. And the firm still backs that approach, but it also sees this stock rally broadening to new regions.

European stocks look attractive, given the latest pickup in global growth, plus the bloc’s lower inflation and recently trimmed interest rates. European companies have become more shareholder-friendly too, announcing a sharp increase in share buybacks.

And there’s been an improvement in corporate governance in Japan too, a region the private bank also finds very attractive.

In emerging countries, it notes that Latin American shares are trading at a cheap 9x 12-month forward price-to-earnings (P/E) ratio, well less than their ten-year average of 12x, and that the region now ranks as the world’s cheapest for stocks. The MSCI Brazil index currently trades at a 7.5x forward P/E ratio.

Here’s how to take advantage. To gain that core US stock exposure, it's hard to beat the SPDR S&P 500 ETF Trust (ticker: SPY; expense ratio: 0.09%).

For access to Europe’s stocks, you could consider the MSCI Europe US Dollar Hedged Index (DBEU; 0.46%). Its expense fees are a little higher than the typical European ETF, but because it’s hedged, it does remove some of the potential foreign exchange risk. For Japan, you could go for the MSCI Japan US Dollar Hedged Index (DBJP; 0.47%), which also removes the currency risk.

Or for Latin America exposure, you could consider the iShares Latin America 40 ETF (ILF; 0.48%).

2. AI, naturally.

The hype is real. And the global wealth manager says investors ought to approach the AI revolution with a patient, long-term mindset, building exposure to potential beneficiaries across different sectors and economies.

The initial winners have been in semiconductor manufacturing and cloud computing – the digital and physical infrastructure that powers AI. But that’s just the start: AI infrastructure will need sprawling data centers that will devour huge amounts of energy – creating growth in renewable energy solutions, cooling and electrical equipment, and more. Over time, the private bank expects the AI boom to produce massive economic productivity gains across almost all industries and sectors.

Here’s how to take advantage. For AI exposure, there are many choices as the impact is so widespread including semiconductors, electrical equipment, industrials, data centers, energy-related, and other sectors. For now, The iShares Semiconductor ETF (SOXX; 0.35%) for exposure to leading semiconductor companies, the Invesco QQQ Trust Series (QQQ; 0.2%) for broad tech exposure, and the Magnificent 7. Finally, for renewable energy, the VanEck Uranium and Nuclear ETF (NLR; 0.61%) looks interesting.

3. The stocks hit hardest by higher interest rates.

The firm still recommends avoiding unprofitable companies and those with upcoming debt maturities. But it sees opportunities starting to blossom in some areas that have taken the toughest hits from the higher-for-longer interest rate environment. And that means private equity, US small- and mid-size stocks, and commercial real estate – especially data centers, housing, and logistics. As interest rates start to fall, these assets will see their valuations rise.

Here’s how to take advantage. US small-cap stocks have lagged behind big-cap ones for a while now. The iShares S&P Small-Cap 600 Growth ETF (IJT; 0.18%) will likely enjoy a strong rally if we see cuts in interest rates.

4. Commodities, including gold.

Let’s hear it for “real assets” like gold and other commodities. Gold is useful as a buffer in times of geopolitical risk, which is good for right now. And it’s been in particularly high demand lately, with certain central banks buying up tons of the shiny metal as they seek to diversify their massive reserves away from the US dollar. Those two factors have had gold’s price shining. The private bank also likes the look of copper and lithium: two of the most important raw materials in the green energy transition. And, yes, you could consider investing in the physical assets themselves, but as JPMorgan points out, the global mining sector is the easiest way to invest in the materials needed for the energy, digital, and security evolutions.

Here’s how to take advantage. For gold, there’s the abrdn Physical Gold Shares ETF ( SGOL; 0.17%). And for gold, copper, and lithium exposure, the SPDR S&P Metals & Mining ETF (XME; 0.35%) provides broad mining exposure.

5. Bonds.

Like most pros, the private bank expected inflation and interest rates to be lower by now: and because of that view, it’d predicted that bonds’ performance would be up there with stocks. Of course, that hasn’t happened and bonds have lagged well behind. So the bank says both short and longer-dated bonds look attractive now, with rates likely to remain higher for longer, but not forever.

Here’s how to take advantage. For short-dated bonds the iShares 1-3 Year Treasury Bond ETF (SHY; 0.15%) and for longer-dated bonds the iShares 7-10 Year Treasury Bond ETF (IEF; 0.15%).