Stock markets (^DJI, ^IXIC , ^GSPC) are trading lower ahead of the highly anticipated Consumer Price Index (CPI) report and the Federal Reserve's rate decision, both scheduled for release on Wednesday. Despite the uncertainty, JPMorgan Private Bank US Equity Strategist Abby Yoder remains bullish on the markets, buoyed by the tech sector's performance.

Yoder notes that earnings growth has been robust, driven primarily by the tech industry's performance. She highlights that all eleven sectors exceeded expectations in the first quarter, with tech companies leading the charge through expanded margins. Despite slightly elevated valuations, Yoder expects this trend to continue, as tech companies are set to "grow into those valuations" with the influx of more positive earnings throughout the year.

Regarding the potential for a broader market rally, Yoder says, "That would be a second-half phenomenon." Apart from her bullish stance on the tech sector, she remains overweight in areas such as healthcare, industrials, and consumer discretionary, all of which she anticipates will perform well.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Angel Smith

Video Transcript

Stocks moving lower this morning as investors a way too big tests for the markets tomorrow.

CP I and the fed decision, even with fears around higher for longer rates, strategist broad broadly expect big tech to lead stocks higher through year and driven by A I demand.

Our next guest is one of those strategist.

We have a JP Morgan Private Bank, you equities, ay.

Thank you so much for joining us in studio and you know, you have a pretty bullish outlook here, 5500 year end price target for the S and P. You see that going up to 5750 next year.

What's driving that?

So I think importantly, when we're thinking about the breakdown of returns, right?

That's earnings and multiple.

When we're thinking about both the 5500 and that 5700, that's all coming from earnings growth and that's between 8 to 10% depending on what calendar year you're looking at and the majority of that is being driven by tax, right?

And what we saw in Q one was this really, you know, just strong across the board quarter in terms of earnings, we saw all 11 sectors beat in Q one.

But a lot of that strength was driven by tech and in particular, we saw their margins expand.

And so that's very important to us when we're thinking about, you know, 60% of costs are fixed.

How do you see that incremental uptick in terms of earnings growth, we're seeing that from tech in terms of their margin profile.

And then on the valuation front, like we actually have valuations contracting a little bit.

And that's that again is also being driven by tech.

And when you think about it from a natural standpoint, yeah, their prices are high and their valuations higher than the that the market at the moment.

But they're going to grow into that valuation right through their earnings growth where you get.

So then you naturally see that valuation compress from from a large cap perspective and that seems like a critical part of why you're able to make the tech sort of rally but also inherent concentration within tech part of your book case, when we have a lot of other guests, come on and say that the concentration of the rally in tech is a bearish signal for them.

How are you thinking about the differentiation there?

Well, so there there are two things that I would point out one the the earning, the the concentration is being supported by the earnings, right?

So you're seeing not only the concentration from a market cap perspective, but you're seeing it from an earnings because they continue to outgrow the rest of the market.

Now, you know, coming into the year, we really were thinking that there was going to be this broadening out in terms of the equity market performance into the year end.

And we still do believe that.

But what you're seeing is the, I mean, that was predicated on the growth rate differentials getting narrower, right.

And so what we've seen is we're still seeing that narrow is the rest of the, let's call it 4 93 4 94 catch up to the rest of the mag seven.

But you're still seeing, but what you're seeing is the tech growth rate is staying elevated, right?

So that saw a little bit of an uptick in one Q.

So it's still driving the market in mid teens, eps growth through the end of the year.

But you are starting to see as other sectors come out of their rolling earnings recession, you're seeing their earnings growth also pick up.

So a little bit of a broadening out just not to the same magnitude.

When do you expect if at all, we're going to see that same magnitude of broadening out and what sectors do you think could benefit from that?

So that would be like a second half phenomenon.

And I think for us when we're thinking about it, so we're overweight for sectors were overweight, technology, consumer, discretionary health care and industrials and I would say at the, at the forefront of really coming out of that earnings recession is health care, health care saw their first negative annual earnings growth period last year in 2023 there was a lot of COVID digestion going on across different parts of that sector.

Um And they're about to flip from negative.

So they had a negative one Q or year over year earnings growth rate and that's going to flip positive as we go through the back half of the year.

So you pair that with really attractive valuations in the sector.

And that to us is a pretty nice set up in terms of health care.

I was talking to a source about the health care sector yesterday too who mentioned that their ability to kind of navigate the higher for longer environment is differentiating factor as well and the ability to not have as capital intensive sort of expenditures on the balance sheet.

How much of that is a line of thinking and an investment thesis that our investors listening to this should be really looking at in this hire for longer environment.

Does that apply to other sectors as well?

Yeah, I mean for health care, yeah, they're not as dependent on the interest rate environment when you're when you're thinking about large caps, right?

Like let's be very clear, small cap biotech is a totally different story.

It's riskier, it's much more um I would say exposed to higher interest rates and, and will be challenged in that environment.

But yes, from, from an overall large cap health care perspective, I mean, it's defensive.

It typically again, usually has positive positive earnings growth and we didn't see that last year.

So I think that's a nice differential as well.

Um, industrials is something that we would think would actually benefit from a higher for longer rate environment.

Right?

When you think about the cyclicality of that, we're seeing PM, what we think is bottoming and then you've got structural tail winds around things like A I.

So that's another sector that we do like, you know, interest rate agnostic as relates to, to industrial and speaking of higher for longer, we have updated economic projections from the fed tomorrow if we see less cuts projected by the fed, is that a risk to the market?

What if the fed doesn't cut at all?

Yeah, I mean, look, I think the risk is relates to the fed is not necessarily whether or not they cut it.

All right now, we actually only have one cut penciled in at the end of the year.

It's really like what is the next move and what signal does that send to the market?

And I think if the next move were all of a sudden to become a hike, then that is a totally different story when it, when it comes to equities.

But as of right now, we are still of the base case that we are going to see inflation gradually come down, which is going to lead to that cut.

It just seems like it's going to be later than what was originally anticipated in the beginning of the year.

And I think the question is really getting at, OK, what does that mean in terms of valuations?

How can we continue to defend these valuations?

And I think it's a really and I think this is where like the in the equity risk premium conversation comes in as it relates to equity.

So how do equities look relative to bonds?

And if you look past in the past 15 years, they look really expensive on an equity risk premium standpoint.

But if you extend that out to a period before the the global fund crisis and interest rates weren't zero, the equity risk premium was more compressed similar to how it is today.

And so if you're thinking about the risk of inflation remains elevated, but the risk of recession feels relatively low.

I think in that tug of war of arguments, I think equities win in terms of in terms of relative to fixed income.

Zooming ahead to Friday, Abby when we're, you know, all heading to our Friday evening, happy hour to talk about finance markets as we do.

What will you say was the single biggest driver of the week will be the macro news CP I the fed or a lot of the tech headlines that we're getting from Apple from Tesla and as always in video as well, I think we're in a little bit more of a macro vacuum.

Let's call it till we start earning season again back in mid July, right?

Like I think a lot of the rally that we saw when the market bottom on April 19th through, you know, um end of May and now was really earnings driven.

I think it was fundamentally driven, I think, yes, there were definitely some tail winds as it relates to a macro from a macro standpoint, from a softer inflation print that, that the market really needed.

But I think right now it's gonna be more macro driven than, than micro at the moment.

Happy Yoder JP Morgan, a private bank, us Equity strategist.

Thank you so much for joining us today.