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We've got Hugh Gimber, JP Morgan's global market strategist here. Hugh, it's great to have you on. So, I want to start on this PMI print because I can kind of pick whatever narrative I want from the data it seems. What narrative are you pulling from PMI data today?

I think a mixed picture is a very good summary. What this really tells me is that the path to a soft landing for the Federal Reserve is still open, but it is increasingly narrow because when we start to analyze all of this economic data that's coming through, what you're looking for is the perfect combination of growth holding up just well enough to keep the economy moving forward, but not too well, and reigniting inflationary pressures. And so when we translate that into how we think the Federal Reserve will be moving over the coming quarters, I think the case for them to start lowering interest rates is quite clear at this point. They've seen enough improvement in inflation, they've seen enough of a weakening in the labor market data to be approaching that first rate cut, but importantly, we think they move quite tentatively, because you're certainly not looking at PMI data today, services at 56, and saying, this is an economy that needs immediately lower rates and sharply so. So in my mind, 25 basis points a quarter is probably the right starting point for the Fed, and only accelerating that once they get much weaker economic growth than the data is showing so far.

Do you think this data moves the needle for any Fed voting members who might have been still weighing the potential of a cut in July even?

No. I personally think July is off the table. There's just not really any need for the Fed to come out and surprise the markets at this point. You look at how markets are priced, they are more than fully priced for a move in September, but it's a July decision, I think would come as quite a shock. If anything, the Fed might be worried about sending the signal to the market where people start saying, well, hang on a minute, what does the Fed know that we don't? So no need for them to be moving too quickly. Actually think taking a slightly longer term perspective, when you look out now into how the markets are seeing the Fed move in 2025, there looks to be a little bit too much in the price here. You've got more than 100 basis points of cuts priced by just March. That means that the Fed is going to need to go by more than that once a quarter pace that I've laid out as my base case. So certainly no cause for alarm in the data today, but it talks to this narrow path where Goldilocks has been the market story for the past few months, it's helped the rally that we've seen in areas like small cap, but ultimately our message is, with resilient growth comes resilient inflation, and therefore this, this combination of still booming GDP but with a continued softening in inflation to my mind is going to be a harder and harder one to achieve over the coming months. We're going to need to see some further slowdown in economic activity to keep the Fed on track in terms of moving back to 2%.

So then Hugh, what does that tell us about where you're seeing opportunities? It sounds like maybe there is some opportunity when we are seeing this rotation. It does sound like maybe you think that there's still a way to go in that trade, but are there better bets at this point than small caps?

I think that's right. So this could well be the first earnings season in five quarters where you see positive earnings growth from what I'd call the S&P 493. When you strip out the mag 7, the rest of the market is finally poised to move back into positive earnings territory. So we do see good opportunities in broadening out across the US market, but in my view, this is still a time to be focused on large versus small cap. And that comes down really to the interest rate exposure and how that differs across size. So when you look at the S&P 500, only about 5% of outstanding debt is floating rate. The majority of the large caps debt is parked well out into the future, even 2029 and beyond. But compare that 5% of floating rate for small cap, where you've got close to 40% of outstanding debt as floating rate. And so the perfect environment for small cap is one where growth holds up, but interest rates fall quickly, and therefore you take away some of that debt refinancing pressure. And that's where again, kind of coming back to the data that we're seeing at the moment, I find it hard to combine a picture of still really solid growth and rapid rate cuts, which I think is what markets are getting a bit carried away on. So for me, the rotation holds, looking at broadening opportunities across the S&P 500, but not yet the right time to be moving too far down the size spectrum.

All right, Hugh Gimber, always great to get your insight. Thanks so much for joining us, JP Morgan's global market strategist.