JP Morgan stays overweight on global equities

Strategists at JP Morgan reiterated their 'overweight' stance on global stocks going into 2018, pointing out that economic growth would continue to be above-trend and that analysts' forecasts for corporate profits had room to increase.

Yes, the US economic cycle was nine years old and central banks were beginning to close the liquidity taps.

Nevertheless, "we believe it is too early to sell," they said.

Momentum in economic activity might well have peaked, the investment bank also conceded, but growth was set to continue at an above-trend pace.

Furthermore, US tax cuts were likely to come through and had not been fully priced-in yet. Indeed, in their judgement the consensus for company earnings per share in the States had yet to factor-in any of the potential cuts.

The bounce in oil, which was typically closely linked to trends in earnings, would also boost profits.

Regarding interest rates, JP Morgan stressed how real interest rates were still negative.

"None of the last eight downturns started with real rates below 2%," they said.

However, that did not mean bond yields weren't headed higher from their then current levels, quite the opposite.

Inflationary pressures were building, according to JP Morgan, even as capacity utilisation in the euro area was already at 84%, which was above the cycle average.

Added to that, 2018 was set to be the first year in quite some time when the European Central Bank would not be buying all of the increased bond supply.

Yet higher bond yields were good for equities, JP Morgan argued, "driving asset allocation shift and broadening of the market leadership".

"The common wisdom is that higher yields mean lower P/E multiples, but we disagree. It was lower earnings that would typically mean lower multiples, such as at the turn of '15. Equities tended to take any move up in yields in their stride during the past 10 years' worth of asset reflation."