- Investors should continue to overweight US stocks as they outperform their international peers, according to JPMorgan.
- In a note published on Sunday, JPMorgan reiterated its view that growth stocks, led by technology, will continue to outperform their value peers.
- The continued outperformance of growth stocks relative to value stocks has been consistent with US stocks outperforming international stocks, JPMorgan said.
- Growth stocks are poised to continue outperforming value stocks, as low bond yields will be unable “to support any prolonged rotation,” according to JPMorgan.
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For investors weighing the global opportunity set in stocks, stay overweight the US relative to international, according to JPMorgan.
In a note published on Sunday, JPMorgan argued that despite the overhanging political risk associated with the upcoming presidential election in November, the outperformance of US stocks over their developed international peers should continue in the medium term, as technology stocks continue to lead the market higher.
The top reason JPMorgan continues to favour US stocks is the sector makeup of the S&P 500 index, which is much more concentrated in technology stocks relative to international stock indexes that are more concentrated in energy and financial sectors.
And as technology stocks continue to prosper, don’t expect a rotation back into value stocks any time soon.
According to JPMorgan, “beyond some very transitory tactical opportunities for value bounces,” growth stocks are “likely” to continue outperforming value stocks over the medium term. The bank added, “[low] bond yields in our view will not be able to support any prolonged rotation.”
“Value can only work when bond yields are moving higher,” JPMorgan concluded.
And because central banks around the world are expanding their balance sheets “at a rapid pace,” interest rates are likely to stay “lower for longer,” the bank said.
It’s not just low interest rates that are supporting JPMorgan’s preference for US and growth stocks over international and value. The other reason? Earnings trends.
Despite the decline in earnings for both regions, US earnings growth continues to show significant strength relative to European earnings growth, JPMorgan highlighted.
That earnings growth strength in the US has been driven more so by tech stocks than it has been by financial stocks.
And for investors who overweight developed international stocks relative to US stocks, they need to believe that bank stocks will outperform technology stocks, given their high concentration in international indexes. That’s something JPMorgan “disagree[s] with,” according to the note.
Another metric often cited by investors who are bullish on international stocks relative to US stocks is price-earnings multiples, or relative valuation. Currently, eurozone stocks trade at a 20% discount relative to US stocks, which is in line with historical averages.
And even on a price-earnings basis, eurozone stocks don’t look that cheap, JPMorgan argued.
“Even after adjusting for the differences in sector weights, the Eurozone does not look outright cheap versus the US on P/E metrics,” JPMorgan said.
So while US stocks have already handily beat their international peers, expect that trend to continue into the end of the year and over the medium term, according to JPMorgan.
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