Analysts at JPMorgan said in a note to clients on Monday that they believe it is too early to favor euro zone stocks over U.S. stocks.
Despite the notable performance of the MAG 7 index, which was primarily driven by MAG 7 stocks, the bank says the SPW index saw a modest increase of 6%, peaking in March.
Similarly, they point out that the Eurozone SX5E also peaked in March. “The divergence is likely to peak, but this could happen through winners stopping improving rather than through laggards rising,” JPMorgan notes.
Analysts point out that the peaks recorded by the SPW and SX5E indices coincide with a deterioration in the balance between growth and policy.
They explain that since March, Fed futures have pointed to higher interest rates for a longer period, while economic activity data has begun to show a slowdown compared to the optimistic expectations. This difficult macro balance is expected to continue.
Analysts say “consumer spending and labor markets are slowing, while the PMI rebound that was in place earlier in the year has stalled.”
They add that the Fed’s expected rate cuts, which could begin in September, are likely due to weak labor markets rather than just low inflation. This shift from proactive to reactive cuts could leave the Fed behind the curve.
Slowing growth is expected to weigh on earnings in the second half of the year, with strong EPS growth of 13-15% year-on-year in the third and fourth quarters. This could be challenged by weak corporate pricing, slowing revenues, and declining consumer activity.
JPMorgan continues to favor growth over value, saying, “In order to extend the lead, we need to see a real recovery push,” which is not currently evident.
Investors remain bullish on defensive sectors, particularly utilities and real estate, and suggest a more positive stance on some smaller companies in the UK and the eurozone.
While JPMorgan Chase sees great potential in the eurozone, it cautions that it is “too early to outperform the eurozone against the US,” but a good opportunity could emerge in the second half of the year if certain conditions are met, such as French policy stability and the absence of headwinds from the US dollar and tariffs.
