An interview with the chief global strategist at J.P. Morgan Asset Management.
What’s your stock market outlook for the second half? It’s a particularly challenging year, but I’m reasonably optimistic. The major concerns this year have been about inflation, the Federal Reserve raising rates very rapidly and the possibility of recession. We don’t know about geopolitical events, whether in Ukraine or other situations that will flare up. But I think economic growth can moderate without going into recession, I think inflation can moderate, and I think the Federal Reserve will cool its tone. That should make it a reasonably positive second half for U.S. stocks.
What’s your forecast for the economy and inflation? By the fourth quarter, I expect economic growth, adjusted for inflation, of less than 2.5% year-over-year; by the fourth quarter of next year, less than 2.0%. So I think the economy will grow, but at a much slower pace. On inflation, we expect the consumer price index to be back to 4.3% by the end of this year, 3.5% by the end of next year. Why do I think inflation is going to come down? Because there really is such a thing as transitory inflation. It was caused by the pandemic and the policy response. The pandemic is fading, and supply chains will improve. A lot of the money poured into the economy in terms of fiscal stimulus over the past two years is drying up. That money pushed up demand for a lot of goods. With less demand, inflation will naturally fade.
Why are you convinced we’ll skirt a recession? Despite the two extraordinary recessions we’ve seen since the start of the century—the pandemic recession and the great financial crisis—I think the volatility of GDP has fallen. It’s quite difficult to get a normal recession going. There’s a huge excess demand for labor, and that momentum will keep the economy out of recession. The unemployment rate will drift down to 3.3% by the fourth quarter of this year, which will be the lowest in 70 years, and to about 3.1% by the fourth quarter of next year.
Are U.S. corporate profits in good shape? It is tougher for corporations in general. It looks like operating earnings will be up about 7% to 8% in the first quarter compared to the same period last year. That’s representative of what we’ll see this year. We saw huge gains in earnings last year. Profits are extremely high, but it’s very hard to grow them from here. And companies are facing pressures. A rising dollar hurts the value of overseas earnings. Also, you’ve got rising wage costs, rising interest costs. So …….