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Sept. 19, 2018, 9:33 a.m. EDT

Get ready for U.S. stocks to come off their ‘sugar high’: JPM strategists

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By Barbara Kollmeyer, MarketWatch


Warner Bros/Courtesy Everett Collection
Too much of the sweet stuff...

The tariff war rages on, but U.S. stocks keep on trucking.

The Dow managed nearly a 200-point gain on Tuesday, its fifth-highest close in history, on a bet there is ample time for the U.S. and China continue to threaten a trade war.

“It is inexplicable, but it is a pattern we’ve seen all year,” Kristina Hooper, Invesco’s chief global market strategist, told Bloomberg Radio on Wednesday. And while carefree investors keep brushing those headlines away, she and others say diversification may be in order.

Enter our call of the day from a team of strategists at J.P. Morgan, led by Marko Kolanovic, who see headwinds for U.S. stocks, and suggest investors add some exposure to beaten-down emerging markets.

U.S. assets are riding a “sugar high” thanks to the Trump tax cuts and the “delayed positive impact of weak U.S. dollar and low rates from last year, said Kolanovic and the team in a note to clients.

They expect that sweet boost will wear off in coming quarters as year-over-year comparisons in data and earnings decline, and the impact of a stronger dollar and higher interest rates kick in. As well, the prospect of big tariffs on China trade, if they materialize, would cut 2019 S&P 500 earnings per share, the strategists said.

The divergence between U.S. and international assets has likely “hit extreme levels” and won’t continue, therefore making for an “attractive entry point for taking contrarian positions,” they said.

Note their chart that shows August and year-to-date winners, with the Nasdaq on top and emerging markets dead last.


J.P. Morgan

The biggest headwinds for stocks, according to J.P. Morgan, are the winds of those pesky trade wars, and they’re cautious even though they think the two sides will come to an agreement.

“As half of the trade with China now may be subject to tariffs, there is an increasing probability of corporate earnings being revised lower, dampening the sentiment toward U.S. stocks,” said the strategists whose U.S. overweights include tax beneficiaries and small-caps.

The market

The S&P /zigman2/quotes/210599714/realtime SPX +0.47% , Dow /zigman2/quotes/210598065/realtime DJIA +0.40%  and Nasdaq /zigman2/quotes/210598365/realtime COMP +0.87%  have all opened firmer.

Gold is up some, while crude is bouncing around and the dollar /zigman2/quotes/210598269/delayed DXY +0.20% is off some, owing to strength in the U.K. pound /zigman2/quotes/210561263/realtime/sampled GBPUSD -0.4412% .

Europe stocks /zigman2/quotes/210599654/delayed XX:SXXP -0.32%  are flat to higher, while China /zigman2/quotes/210598127/delayed CN:SHCOMP +1.84%  and Japan /zigman2/quotes/210597971/delayed JP:NIK +0.34%  led Asia higher.

/zigman2/quotes/210599714/realtime
US : S&P US
3,386.15
+15.86 +0.47%
Volume: 1.73B
Feb. 19, 2020 5:05p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
29,348.03
+115.84 +0.40%
Volume: 242.65M
Feb. 19, 2020 5:05p
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/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
9,817.18
+84.44 +0.87%
Volume: 2.29M
Feb. 19, 2020 5:16p
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/zigman2/quotes/210598269/delayed
US : U.S.: ICE Futures U.S.
99.90
+0.20 +0.20%
Volume: 0.00
Feb. 20, 2020 6:22a
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/zigman2/quotes/210561263/realtime/sampled
US : Tullett Prebon
1.2862
-0.0057 -0.4412%
Volume: 0.0000
Feb. 20, 2020 6:31a
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/zigman2/quotes/210599654/delayed
XX : STOXX
432.53
-1.37 -0.32%
Volume: 0.00
Feb. 20, 2020 12:17p
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/zigman2/quotes/210598127/delayed
CN : China: Shanghai
3,030.15
+54.75 +1.84%
Volume: 34.57B
Feb. 20, 2020 3:00p
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/zigman2/quotes/210597971/delayed
JP : Nikkei
23,479.15
+78.45 +0.34%
Volume: 0.00
Feb. 20, 2020 3:15p
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