JPMorgan's Gabriela Santos on Market Momentum Unwind and Recession Risks

Recession Probabilities and Economic Data

• ⚠️ JPMorgan Asset Management does not believe a recession is the most likely scenario, but acknowledges the probability has increased from a month ago, raising downside risk to the base case of 2% growth.
• 📊 The discussion between soft and hard economic data is highlighted, noting that ISM Services and manufacturing data have historically suggested a stagnant economy, yet actual growth has exceeded potential post-pandemic.
• 💡 It's cautioned against extrapolating soft data too far when assessing recession probabilities or specific growth estimates.

Defensive Stocks and Real Assets

• 📈 The strength in utilities and other defensive stocks like healthcare is acknowledged as a sign of market caution.
• 🏠 The utility sector's themes can be expressed through private markets and infrastructure, offering recession hedging as essential services remain in demand and inflation hedging through price increases.
• 💰 Potential capital appreciation is also noted due to rising electricity demand.

Momentum Unwind and Market Rotation

• 📉 The market reaction is characterized as a momentum unwind, particularly in the "Magnificent 7" stocks, rather than pricing in a recession.
• 🏦 Stocks outside the Magnificent 7 are only down 3% from their all-time highs, indicating the recent market movements are concentrated.
• 💡 The "Mag 7" peaked on Christmas Eve, with subsequent declines attributed to lower earnings surprises and disruptions in technological innovation.
• 🔄 A rotation from growth to value and from US to international stocks, as well as a shift into bonds, is expected to continue after years of concentrated market performance.
• 🛡️ There is room for further rotation, especially if growth slows significantly, making quality defensive assets more attractive.