Although we’ve thought that clarity on US-China trade as the single most important policy change that
could improve growth and earnings expectations, Fed policy becomes the more immediate focus given the Jan
30th FOMC meeting. That the Fed is pausing seems indubitable given Fedspeak since the December meeting;
the questions are (1) how long will the pause last; (2) is the next rate move higher or lower; and (3)
what's the balance sheet’s path. The JPM view is that this is a six month hiatus (half as long as the
2016 pause) before the Fed resumes tightening, since the US economy remains near full employment despite
the Trump Administration's disruptive policies ex tax cuts. Market pricing is much more pessimistic in
pricing a cut next year, because investors assign higher odds to some combination of slower growth, lower
inflation or change in Fed reaction function. Next week the Fed will likely not issue the kind of
calendar guidance that markets would welcome because data-dependence implies that the Fed has little
confidence on how macro variables and Washington will evolve. Our economists just expect a modified
statement that strengthens market conviction in a pause but doesn’t abandon the medium-term path of
higher rates (see Feroli from Jan 25th). The word "patient", which former Chair Bernanke introduced in
late 2014 to signal an institutional commitment to a slow-moving Fed, could move from sideline speech
into the text. Balance sheet run-off could be mentioned in the press conference, but with no indication
of a decision. But if the Fed ended this ambient tightening, some markets might retest their 2018
Global equity markets showed resilience this week despite headwinds from weaker PMIs in Eurozone and
Japan. Regionally, EM continued to outperform DM and US outperformed Europe. At a sector level, Cyclicals
outperformed Defensives in both US and Europe. Our Global equity strategists remain constructive,
believing that equities will keep bottoming out. They expect weaker earnings in Europe on the back of
further activity slowdown during Q4. Expectations of 3% EPS growth in Europe don’t appear high, but are
still likely to be missed. That said, our strategists do not expect equities to fall because of this.
Equity P/Es have derated significantly over the last few months and should provide some cushion. Our
strategists argue that one doesn’t need positive earnings to be bullish on stocks.’15-’16 episode is the
case in point. Equities bottomed out in Feb’16 but EPS revisions only turned positive in Dec ’16. They
believe that equities will continue bouncing on the back of Fed pausing, USD peaking and China/US
activity momentum stabilizing. They remain OW US vs Europe, as among other US results in Q4 are likely to
be much stronger than European ones. They are also OW EM vs DM, & reiterate their recent upgrade of
Commodities, notably Energy, as well as US Banks and UK domestic plays.
In the US, buyback activity has been very strong during 4Q18 and the team expects it to remain robust in
2019. They believe buybacks will remain primarily funded by cash flow (~$2tn) and balance sheet. Also,
S&P 500 companies have repatriated ~$340bn or ~27% in foreign held funds thus far with an additional ~$1
trillion still held abroad. In 2019, they expect S&P500 companies to execute ~$800bn in buybacks and
return an additional ~$500bn via dividends, which is inline with 2018 shareholder return.
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