Investing.com -- Investors hope Trump’s second term will bring a broadening in equity market participation, similar to his first, but JPMorgan strategists see "significant differences" in the backdrop.
When Trump first became US president in 2017, the reflation trade and synchronized global growth pushed emerging markets (EM), the eurozone, and Japan to outperform the S&P 500 in dollar terms. However, according to JPMorgan, the current macroeconomic setup is different.
“First, regional growth differential was sharply narrowing then, with eurozone outright outgrowing the US,” strategists led by Mislav Matejka said in a Monday note.
This outperformance was despite US tailwinds from deregulation and tax cuts. A major driver then was China’s early 2016 stimulus, which boosted global growth.
“The sequencing is different now, and thus is the 2025 growth picture,” strategists added.
The dollar’s behavior is also likely to diverge from 2017. The convergence in growth back then pushed the greenback down through 2017, with this weakness acting as a tailwind for risk assets, EMs, international equities, and commodities.
“It is not clear that USD will repeat the same pattern this time around,” strategists emphasized.
Meanwhile, trade uncertainty remains an overhang. JPMorgan points out that in 2017, there was no trade war, but once tensions escalated in 2018, the dollar appreciated and tariffs disrupted global markets.
With potential new tariff measures on China and Europe, the firm sees the trade risk as a key factor that could influence sector and regional leadership.
Bond yields are another key difference. During Trump’s first term, yields started at 1.8%, leaving room for the reflation trade. Now, elevated levels of yields and larger fiscal deficits “could be less forgiving,” Matejka and his team said.
They also warn that inflation concerns may resurface, and any renewed yield rise could weigh on equities.
In their report, strategists also questioned whether the US technology sector can maintain its leadership.
“Where we do think US exceptionalism is fading is in Tech space, we are Neutral the sector and do not see it leading anymore,” they wrote.
One of the main challenges is the high expectations around the Magnificent 7, with strategists questioning whether this group can sustain its first-mover advantage. “Historically, it was never the incumbents which benefitted from the technological disruption, but the outsiders,” they added.
JPMorgan reiterated last summer’s downgrade of Growth stocks from Overweight to Neutral and continues to recommend a shift from Semiconductors to Software (ETR:SOWGn). They also expect the S&P 500 Equal Weight Index to hold up better than the broader S&P 500 this year.