JPMorgan strategists believe investors should consider shifting towards defensive and commodity stocks in anticipation of upcoming rate cuts by central banks.
Historically, defensives have struggled when bond yields were rising, but this phase might be ending, the Wall Street giant notes.
Now, during the November-December episode, cyclicals rallied as the US 10-year yield tumbled 120 basis points, from 5.0% to 3.8%. According to JPMorgan, the rally was driven by market anticipation of an acceleration in activity, spurred by a Fed pivot and easing financing conditions. As a result, the briefly outperformed the during that period.
“This time around, the backdrop could be the softening activity momentum, as seen in a notable fall in US CESI most recently, into negative territory,” strategists wrote in a Tuesday note.
“If bond yields are falling as economic growth is moderating, the sector leadership is likely to be more Defensively tilted. Indeed, in Q2 so far, Defensives are ahead in both the US and in Europe,” they added.
The current market environment, marked by falling bond yields and softening activity momentum, supports this defensive tilt.
The strategists believe that utilities and real estate sectors are particularly likely to rebound, regardless of bond yield movements. Despite recent uptrends, these sectors remain attractive based on valuation metrics, with utilities being the top-performing defensive sector in the US.
In addition to defensive stocks, the bank also recommends a barbell strategy that revolves around commodity stocks. To be more specific, JPMorgan said its commodity strategists are bullish about industrial commodity prices for the second half of the year, “which should support Miners’ earnings per share,” the note states.
In terms of large versus small-cap stocks, JPMorgan maintains a cautious stance on small caps, particularly in the US, where they expect them to necessitate a series of rate cuts to rally. However, they see potential in European and UK small caps after the start of rate cuts in those regions.
