EYE ON THE MARKET | OUTLOOK 2024
Pillow Talk
Pillow Talk. Falling US inflation and possible Fed easing are increasing talk of a soft landing rather
than a recession, hard landing and bear market. Leading indicators point to slowing economic
growth but not a collapse. While odds of a soft landing have increased, markets are already
pricing that in at a time of single digit earnings growth and single digit returns on the median
stock. Our 2024 Outlook takes a closer look and includes sections on the national debt, weight
loss drugs, antitrust risks to US megacap stocks, Japan, China and ten surprises for the new year.
By Michael Cembalest | Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management
MARY CALLAHAN ERDOES
J.P. Morgan Asset & Wealth Management
As we head into the new year, we want you to know what a privilege it is to serve as your advisor.
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Here’softothe
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exciting investment opportunities, as well as some areas where we see reason to
proceed with caution.
Sharing these perspectives and opportunities is part of our deep commitment to
you and what we focus on each and every day. We are grateful for your continued
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Most sincerely,
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
2024 Outlook: Pillow Talk
Falling US inflation and prospects for easier Fed policy are increasing talk of a soft landing rather than a
recession, hard landing and bear market. Leading indicators point to slowing growth but not a collapse. Select
real estate, corporate and household delinquency rates are rising, but as illustrated below these are usually
lagging indicators for investors. In other words, equity markets normally bottom well before the peak in
economic distress, with the dot-com cycle being the notable exception. There’s still risk of recession next year;
the important point is that even if it did occur it is likely to be a mild one, particularly with the Fed providing
ample back-door liquidity to the banking system.
The challenge for investors: the damage to public sector finances from mega-deficits, markets that already price
in a very soft landing and the concentrated contribution of megacap stocks. In 2023, S&P 500 earnings were
flat; they were up 33% for the 7 megacap stocks and down 5% across the rest of the S&P 500. All things
considered, 2024 looks like a year of slowing GDP growth, single-digit earnings growth and single-digit returns
on the median S&P 500 stock.
If so, a diversified portfolio of cash, long-duration government bonds, high quality corporate bonds and equities
is a good way to think about investing. Industrials and energy look interesting given US industrial policies, and
so does Japan. The outlook concludes with a detailed review of antitrust risks facing US tech stocks, a deep dive
on weight loss drugs, the US Federal debt, China and my top ten surprises for 2024 in honor of Byron Wien.
Michael Cembalest
JP Morgan Asset Management
Equities tend to bottom first during recessions
Symbols: time of worst reading
COVID
Equities
ISM manufacturing survey
GFC
GDP
DotCom
the exception
Payrolls
1990's S&L
S&P Earnings
1980's double dip
Housing starts
70's stagflation
High yield default rates
Eisenhower
Real estate delinquencies
End of recession
-8
-4
0
4
8
12
16
20
24
28
32
Months since beginning of recession
Source: BEA, Census, NAR, Shiller, Bloomberg, S&P/Dow Jones, JPMAM, 2023. Past performance is not a indicative of future results
1
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Table of Contents
Leading indicators point to weaker US growth but not a sharp decline ..................................................................3
Inflation monitor: Mission mostly accomplished ...................................................................................................5
Leviathans: US equity markets and the domination of megacap stocks ..................................................................7
Antitrust monitor: the latest on DoJ/FTC lawsuits against Big Tech and Epic’s big win vs Google ............................9
European and Japan equities: two ships passing in the night ............................................................................... 13
Fixed income: The Low Spark of High Yield Bonds ............................................................................................... 15
US Debt Sustainability: The Boiling Frog ............................................................................................................. 19
US Consumer: Still going strong but gradually running out of ammunition ........................................................... 24
China equities: all value traps come to an end…eventually .................................................................................. 27
The Fats Dominoes: the impact of weight loss drugs on equity markets ............................................................... 30
Top ten surprises for 2024 in honor of Byron Wien ............................................................................................. 39
Chart of the year: the most intense global tightening cycle in decades is ending
Central banks hiking/cutting rates
Number of central banks
50
40
30
20
10
0
-10
-20
-30
-40
-50
-60
1990
Rate hikes
Rate cuts
Net policy moves
1995
2000
2005
2010
2015
2020
Source: Individual Central Banks, Haver Analytics, JPMAM, November 2023
Acronyms
CBO Congressional Budget Office; CMBS commercial mortgage backed securities; CPI consumer price inflation;
DoJ Department of Justice; EBITDA earnings before interest, taxes, depreciation and amortization; ECI
employment cost index; EPS earnings per share; EV electric vehicles; FDI foreign direct investment; FTC Federal
Trade Commission; GFC global financial crisis; IMF International Monetary Fund; ISM Institute for Supply
Management; LEI leading economic indicators; NFIB National Federation of Independent Business; P/E price to
earnings; SOE state owned enterprise; TSMC Taiwan Semiconductor Manufacturing Company; YTD year to date
2
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Leading indicators point to weaker US growth but not a sharp decline
Many leading indicators point to weaker growth but not a sharp recession. While our preferred leading indicator
(ISM new orders less inventories) is actually improving on the margin, other leading indicators point to weaker
growth. We show four of them below: projections of capital spending, growth, construction and profits. Other
weak indicators include small business expectations. Remember, investors have to consider the risk of a hard
landing in profits even if the there’s a soft landing in the economy (e.g., 2001).
US new orders less inventories
Small business expectations
Index (50+ = expansion)
70
65
Index, 3 month average
ISM manufacturing PMI composite index (lhs)
ISM new orders less inventories (3 month lead, rhs)
30
Net % of NFIB Optimism Survey respondents
20%
Sales
10%
20
60
0%
55
10
-10%
50
0
45
-20%
-30%
40
-10
35
30
1983 1988 1993 1998 2003 2008
Source: Bloomberg, JPMAM, November 2023
-20
2013
2018
2023
Profits
-40%
-50%
1986 1990 1994 1998 2002 2006 2010 2014 2018 2022
Source: Bloomberg, JPMAM, November 2023
US bank lending standards => US non-residential capex
Leading economic indicator => construction activity
Percent, y/y
Percent, y/y
25%
20%
Net % tightening
-50
Non-residential capex (lhs)
Bank lending standards (9 mo. lead, inverted, rhs) -30
5%
10
0%
30
-5%
70
-15%
90
1997
2002
2007
2012
2017
2022
0%
-4%
-5%
-8%
Coincident and leading economic indicators
Percent, y/y
Percent y/y
-16%
-25%
1998
60%
15%
50%
10%
40%
2%
5%
30%
0%
0%
-2%
-5%
6%
-20%
2003
2008
2013
2018
2023
Fed funds, effective corporate tax rate, unemployment,
productivity growth => Corporate profits, Percent, y/y
20%
Coincident indicators (lhs)
Leading indicators (rhs)
8%
-12%
-15%
Source: US Census, Conference Board, JPMAM, November 2023
Source: Bloomberg, JPMAM, Q3 2023
10%
12%
4%
5%
50
-10%
16%
8%
-10
10%
4%
Corporate profits
Leading indicator model (18 mo. lead)
20%
10%
-4%
-10%
-6%
-8%
-10%
1970
Construction activity (lhs)
LEI Index (18 mo. lead, rhs)
15%
15%
-20%
1992
Percent, y/y
25%
1980
1990
2000
2010
Source: Conference Board, JPMAM, November 2023
2020
0%
-10%
-15%
-20%
-20%
-30%
1998
2002
2006
2010
Source: Piper Sandler, Q3 2023
2014
2018
2022
3
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Why hasn’t the increase in Fed policy rates caused a US recession? As explained in our “Rasputin” Eye on the
Market last August, monetary policy is tighter but below the level of real rates that led to prior recessions;
corporate cash flow is still in good shape, unlike the cash flow deficits which preceded prior recessions; and the
corporate sector termed out debt maturities before the rise in rates, partially immunizing itself from the interest
spike that preceded prior recessions. Private sector credit creation was similar to prior cycles, but debt servicing
risks are lower for companies and households that termed out maturities.
While we see the risk of recession receding, recessions tend to occur at least 7 quarters after the initial Fed hike,
and that’s where we stand as 2024 begins. The fact that a recession hasn’t taken place yet is not a guarantee
that it won’t. But estimates of liquidity are expanding based on the various facilities that the Fed provides to
the banking system (bottom chart), which is another cushion mitigating any decline in growth.
Real cost of money
US corporate sector financial balance
Real interest rates (FED Funds - Core CPI), 21 day smoothing
% of corporate gross value added, 4-quarter average
4%
10%
8%
* Gross savings less capital transfers, capital
expenditures and foreign profits retained abroad
2%
6%
4%
0%
2%
-2%
0%
-2%
-4%
-4%
-6%
-6%
1960
1970
1980
1990
2000
2010
2020
'57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12 '17 '22
Source: Bloomberg, JPMAM, December 26, 2023
Source: Federal Reserve, BEA, JPMAM, Q3 2023
Corporate net interest costs stable despite rising funds rate
US private non-financial credit creation as a % of GDP
Percent
Percent, 2-quarter annualized change / GDP
Percent
120%
100%
20%
Corporate net interest payments
as a % of after-tax NIPA profits
15.0%
16%
12.5%
10.0%
80%
12%
60%
8%
40%
7.5%
5.0%
2.5%
4%
20%
Fed funds rate
0%
1970
1980
1990
2000
Source: Bloomberg, JPMAM, Q3 2023
17.5%
0.0%
-2.5%
0%
2010
2020
US liquidity conditions set to improve in 2024
Liquidity proxy, $US trillion
$7.5
$7.0
$6.5
-5.0%
1960
1970
1980
1990
2000
Source: Federal Reserve, BEA, JPMAM, Q2 2023
2010
2020
Recessions usually take place at least 7 quarters after the
initial Fed hike
Fed funds initial
1st quarter of
Quarters after
hike
recession
initial hike
Q3 1958
Q3 1960
8
$6.0
Q4 1967
Q1 1970
$5.5
Q2 1972
Q1 1974
7
$5.0
Q2 1977
Q2 1980
12
Q4 1980
Q4 1981
4
Q4 1986
Q4 1990
16
Q2 1999
Q2 2001
8
Q3 2004
Q1 2008
14
$4.5
$4.0
$3.5
Projected impact of Bank
Term Funding Facility,
Overnight Reverse Repo
Facility and Treasury
General Account
$3.0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Source: Steno Research, December 2023
9
Source: Piper Sandler, 2023
4
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Inflation monitor: Mission mostly accomplished
The US and other developed economies have experienced substantial declines in inflation vs peak levels. That’s
what is driving the chart shown earlier on declining central bank rate hikes.
Developed world core inflation declines
US consumer price inflation measures
3-month percent change, annualized
Percent, 3 month annualized change
9%
12%
10%
Cycle peak
8%
Latest
7%
Cleveland Fed median CPI
Atlanta Fed sticky CPI
Cleveland Fed trimmed mean CPI
6%
8%
5%
6%
0%
Source: Haver Analytics, JPMAM, November 2023
Switzerland
US (PCE)
Euro Area
Australia
Canada
Norway
UK
2%
Sweden
4%
New Zealand
4%
3%
2%
1%
0%
1985
1990
1995
2000
2005
2010
Source: Bloomberg, JPMAM, November 2023
2015
2020
Breathing room for the Fed is coming from falling supply chain pressures; rising auto inventories and falling
used vehicle values; and timely measures of residential rent inflation which are also declining. There’s also a lot
of residential real estate supply coming online, particularly in multifamily. Futures markets are pricing in 1.4%
of Fed easing by the end of 2024; I hope it’s less than that since too much easing too fast could reignite inflation,
which would be a real problem for the Fed and for markets. The Fed has enough egg on its face already.
Supply chain pressures subside
US used vehicle prices fall and auto inventory recovering
FRBNY Global Supply Chain Pressure Index
Manheim US Index
Percent of average 2019 level
5
265
120%
4
245
100%
3
225
2
205
1
185
0
165
-1
145
-2
2018
2019
2020
2021
Source: Bloomberg, JPMAM, November 2023
2022
2023
80%
Used vehicle value (lhs)
Inventories (rhs)
125
2019
2020
2021
2022
Source: BEA, Bloomberg, JPMAM, November 2023
Housing supply under construction
Percent, annualized 6-month change
Percent of owner occupied housing stock
18%
1.6%
15%
1.4%
0%
2023
2024
1.2%
CPI Rent
9%
6%
Multi-family
1.0%
0.8%
3%
Zillow rent
index
0%
-3%
2016
40%
20%
Timely residential rent measures vs CPI rent
12%
60%
2017
2018
2019
2020
2021
Source: Bloomberg, Zillow, JPMAM, November 2023
2022
2023
Single-family
0.6%
0.4%
0.2%
2000
2003
2006
2009
2012
2015
2018
2021
2024
Source: Bloomberg, US Census, JPMAM, November 2023
5
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
We also expect wage inflation to decline based on the decline in advertised wages (second chart); observed
declines in temporary help, manufacturing and overtime hours worked, unit labor costs, the “job switcher vs
job stayer” premium, the share of private industries with rising employment and the voluntary quits rate; and
rising female labor force participation. While negotiated pay raises are still at peak levels, union workers are
only 7% of the workforce, below the 20%-30% range which prevailed during the 1970’s.
Wage inflation measures
Wages in job postings => Wages
Percent
Percent, y/y
8%
Negotiated raises: avg year 1 raise in union contracts
Atlanta Fed Wage Tracker
Employment Cost Index y/y wages
7%
6%
Percent
7%
6%
10%
Atlanta Fed Wage
Growth Tracker
5%
5%
4%
Avg. growth in wages
advertised in job postings
(4 mo. lead)
8%
6%
4%
4%
3%
3%
2%
2%
2%
1%
0%
1985
1990
1995
2000
2005
2010
Source: BLS, Bloomberg Law, JPMAM, Q3 2023
2015
1%
0%
2000
2004
2008
2012
2016
2020
2024
Source: Steno Research, Bloomberg, Indeed, JPMAM, November 2023
2020
On inflation and US energy/industrial policy. Looking a few years out, inflation risks tilt higher due to large US
fiscal deficits and the impact of new US energy/industrial policies. A constant theme in our annual energy piece
is the duplication of generation capacity required to accompany high renewable power penetration. The first
chart below illustrates what I mean by this. MISO is one of the larger independent system operators, stretching
from Minnesota to Louisiana. As wind and solar capacity increases, MISO will not be able to reduce natural gas
capacity on a 1:1 basis. The red line shows the estimated modest reduction in gas capacity that can be shuttered
as wind/solar increase. Whether backup power is provided by thermal generation or batteries, increased capital
investment will reverberate through the cost of power.
As for semiconductor policy, TSMC is building two new fabs in Arizona, one for 4-5 nanometer chips (opening
soon) and another for 3 nanometer chips opening in 2027. As per our sources and TSMC’s CFO1, the $40 billion
cost of TSMC’s US fabs is 4-5x times higher than the same facilities in Taiwan. Capital costs are only part of the
overall expense, but US labor costs are higher than Taiwan’s as well. It makes sense for the US to renationalize
semiconductor supply chains due to geopolitical risks, but investors should be aware of the implications for
supply chain costs, particularly in semiconductor-intensive EVs, wireless communication and AI/computing.
MISO: wind, solar and gas capacity as a function of
wind/solar share of load
Global semiconductor market value
Megawatts
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
US$, billions
Natural gas capacity
Wind and solar capacity
8%
12%
16%
20%
24%
28%
32%
36%
40%
44%
Wind and solar generation less curtailment as a share of load
Source: EIA, JPMAM calculations, 2023
1
Wired comm.
Consumer electr.
Industrial electr.
Automotive
electronics
Wireless
communication
Computing and
data storage
2021
2030
Source: "The semiconductor decade: A trillion-dollar industry", McKinsey &
Company, April 2022
“Y 2022 Earnings Call”, Taiwan Semiconductor Manufacturing Co Ltd, January 12, 2023
6
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Leviathans: US equity markets and the domination of megacap stocks
Markets are at a unique juncture: yields on equities, high grade bonds, T-bills and REITs have converged, which
hasn’t happened in 20 years. If this remains the case, holding some cash looks like good value on a risk-adjusted
basis. As shown on the right, equity valuations are at the high end of the range for the market cap-weighted
S&P and closer to median for the equal weighted S&P. The valuation peaks in 2020/2021 are no longer relevant
now that the Fed will presumably maintain a positive real cost of money. Also, the internals of the US corporate
sector are a bit weaker than headline S&P 500 earnings suggest:
•
US corporate revenues and S&P operating earnings per share have been flat in real terms since early 2022
• Free cash flow of the S&P 500 excluding the 7 megacaps has also been flat since that time (see next page)
After the fall rally, US equity markets already price in a soft landing. We expect single digit earnings growth
and single digit returns on the median US stock in 2024, with continued outperformance by the megacaps.
Convergence of yields across assets
S&P 500 valuations
Percent
Forward P/E multiple
S&P 500 12M forward earnings yield
US corporate investment grade bonds (YTM)
US three-month Treasury rate (YTM)
All Equity REITs implied unlevered cap rate
12%
10%
24x
S&P 500 (market-cap weighted)
22x
8%
20x
6%
18x
4%
16x
2%
14x
S&P 500 (equal-weighted)
19x
16x
0%
2000
2003
2007
2011
2015
2019
2022
Source: Bloomberg, JPMAM, December 26, 2023
12x
1995
2000
2005
2010
Source: FactSet, JPMAM, December 26, 2023
2015
2020
From a sector perspective, industrials and energy look interesting in addition to technology. As shown on the
left, industrials are inexpensive vs the market and should benefit from energy, semiconductor and infrastructure
bills. The table shows free cash flow and valuation for the energy sector. The greener the shading, the cheaper
that indicator is vs the market. I don’t expect energy valuations to improve much given stranded asset concerns.
Even so, the energy sector still looks like an attractive source of earnings yield, dividends and stock buybacks.
Industrial valuations vs the market
Industrial sector forward P/E vs S&P 500
1.25
1.20
1.15
1.10
1.05
1.00
0.95
0.90
0.85
0.80
1996
2001
2006
2011
Source: FactSet, JPMAM, December 26, 2023
2016
2021
Percentile rank of energy sector valuations relative to S&P 1500,
start of available data to Nov 2023
Enterprise value to
cash flow (EBITDA) Free cash flow yield
Last 12 M Next 12 M Last 12 M Next 12 M
Oil & Gas Drilling
5
2
75
94
Oil & Gas Equipment
5
2
79
91
& Services
Integrated Oil & Gas
4
3
87
86
Oil & Gas Exploration
7
7
85
88
& Production
Oil & Gas Refining &
3
9
95
95
Marketing
Oil & Gas Storage &
13
14
62
70
Transport
Energy
4
4
88
87
Source: FactSet, JPMAM, November 2023
7
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Given limited impacts from antitrust so far (see next section), the valuation of the megacaps largely reflects
their higher margins and free cash flow. The percent of market cap that the “magnificent 7” represent is at an
all-time high, and they accounted for most of the equity market gains in 2023. Another sign of concentration:
last year also saw the second highest percentage of S&P 500 stocks underperforming the index since 1980 (72%
underperformed vs 52% average). But without judicial brakes on them, the strong are getting stronger and I see
little reason, other than valuations that become too high relative to the market, that this should change.
On this latter point, see the bottom chart. While megacap stocks look increasingly expensive relative to the
market, after adjusting for their higher earnings growth expectations they don’t look nearly as overpriced.
The challenge: as shown in the last chart, everyone seems to agree; this is a very crowded trade.
Market cap of largest 7 companies in S&P 500
Magnificent 7 stocks led S&P 500 in 2023
Percent of total index market cap
Percent, YTD return
30%
80%
28%
70%
26%
60%
24%
50%
22%
40%
20%
30%
AAPL, AMZN,
GOOGL, META,
MSFT, NVDA,
TSLA
18%
20%
16%
10%
14%
0%
12%
1996 1999 2002 2005 2008 2011 2014 2017 2020 2023
Source: FactSet, JPMAM, December 26, 2023
Source: Bloomberg, JPMAM, December 27, 2023
Magnificent 7 growth in free cash flow vs rest of S&P 500
Magnificent 7 profit margin vs rest of S&P 500
Index (100 = January 1, 2018), 90 day smoothing
Percent
230
220
Magnificent 7
210
200
190
180
170
160
150
140
S&P 500 ex-Mag 7
130
120
110
100
90
2018
2019
2020
2021
2022
2023
2024
Source: Bloomberg, JPMAM, December 27, 2023
25%
Magnificent 7
S&P 500
23%
S&P 500 ex-Mag 7
Magnificent 7
21%
19%
17%
15%
13%
11%
9%
7%
S&P 500 ex-Mag 7
5%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Source: Bloomberg, JPMAM, December 27, 2023
Valuations of Magnificent 7 vs median S&P 500 stock
Nasdaq 100 positioning: asset managers & leveraged funds
Ratio
Net # of contracts, thousands (>0 = net long positions)
2.0x
120
1.8x
Relative P/E
1.7x
1.6x
100
80
1.4x
60
1.2x
40
1.0x
0.9x
0.8x
Relative P/E ratios adjusted for long
term earnings growth expectations
0.6x
0.4x
2013
2015
2017
2019
2021
2023
Source: GS Global Investment Research, JPMAM, November 2023
20
0
-20
2010
2012
2014
2016
2018
Source: CFTC, JPMAM, December 19, 2023
2020
2022
2024
8
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Antitrust monitor: the latest on DoJ/FTC lawsuits against Big Tech and Epic’s big win vs Google
This section is not “appendix” material. Given the contribution of megacaps to market returns, antitrust risks
are one of the most important dynamics to understand regarding their profit and margin sustainability.
After Biden was elected in 2020 we spent a lot of time on antitrust issues:
•
Antitrust enforcement by the DoJ had fallen to a post-war low by 2017, and industry consolidation had
reached the prior 1969 peak
•
The Biden Administration was intent on increasing antitrust enforcement and appeared to have allies
among House Republicans who were hostile to big tech for their own reasons
•
The US Department of Justice filed its Google lawsuit, after which states piled on with their own
•
Some politicians advocated repeal of Section 230 of US telecommunications law which provides indemnity
against lawsuits resulting from social media comments that are posted or censored
•
The FTC filed an antitrust lawsuit to force Meta to unwind its acquisitions of Instagram and WhatsApp
•
The 2020 House Judiciary Committee report issued on antitrust (reflecting the majority Democratic view on
the committee at the time) laid out an energized antitrust agenda that targeted Meta, Google, Amazon and
Apple. Recommendations included Glass-Steagall legislation for the tech sector (break up lines of business),
rules to prevent discrimination and self-preferencing, merger prohibition, safe harbor for new publishers,
prohibition on abuse of bargaining power, rules on data portability/interoperability, strengthening Section
2 of the Clayton Act (price discrimination), strengthening Section 7 of the Clayton Act (acquisitions that
foster monopolies) and restoring enforcement Agencies to full strength
Department of Justice antitrust case filings
Industry consolidation versus prior 1969 peak
Number of cases filed
Revenues of largest 15 companies as % of US GDP
45
12%
40
35
Mergers
Monopoly
Restraint of trade
10%
30
8%
25
6%
20
4%
15
10
2%
5
0%
0
'70
'75
'80
'85
'90
'95
'00
'05
'10
'15
Source: United States Department of Justice. November 2023.
'20
1969
2000
2023
Source: Bloomberg, BEA, Fortune 500, J.P. Morgan Global Economic
Research, JPMAM. 2023.
Here we are three years later and not much has changed, although the FTC/DoJ are trying
• There’s little visible Congressional momentum for Section 230 repeal
• Proposed legislation that operated under the presumption of monopolistic behavior simply based on size or
market capitalization never got passed
• There are 20-30 years of existing case law that embrace the consumer welfare standard and which support
the notion that BIG is not necessarily BAD when it comes to antitrust. Even if the DoJ/FTC prevail in one of
their cases, such rulings might not hold up on appeal given the composition of Appellate and Supreme Courts
• Most antitrust investigations are focused on price fixing and bid-rigging rather than on exclusionary
anticompetitive activities
9
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Here’s a summary of the major antitrust cases underway.
• GOOGLE. The legal scope of the DoJ lawsuit against Google has been narrowed2 to mostly focus on Traffic
Acquisition Costs (TAC; see box). Should Google lose, device users would still be prompted to pick a search
engine, and most might select Google anyway (which is what happened in Europe). According to Morgan
Stanley: if Google reduced its TAC payments by 50%, it would have to lose ~15% digital advertising market
share before the margin impact would be negative
• Closing arguments are set for mid-2024, final ruling not expected until 2025. If Google loses, the lawsuit
would move to a remedies phase which could include an additional trial, all of which could take time including
appeals; and its contracts with Apple and Samsung would presumably have to be renegotiated in accordance
with the court’s definition of acceptable device placement agreements
• Another potential loser from the Google lawsuit: Apple, which earns an estimated $18-$20 billion per year
from Google. In 2020, the DoJ claimed that 15%-20% of Apple’s worldwide annual income was derived from
Google payments; and in 2023, Sanford Bernstein estimated that this figure is still ~15%. In November 2023,
Google’s CEO confirmed under cross-examination during the Epic Games trial that Google shares 36% of its
advertising payments originating on Safari with Apple in exchange for default status on Apple devices
Google Traffic Acquisition Costs (TAC) by year
Percent
US$, billions
40%
38%
36%
$50
Google TAC payments as
% of ad revenues (lhs)
34%
32%
$45
$40
$35
TAC payments (rhs)
$30
30%
$25
28%
$20
26%
$15
24%
$10
22%
$5
20%
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Source: Google 10-K filings, JPMAM, 2022
$0
Google’s Traffic Acquisition payments for default
status on devices. Google pays $ billions a year to
device makers (Apple, Motorola, LG, Samsung),
wireless carriers (AT&T, T-Mobile, Verizon) and
browser developers (Mozilla, Opera, UC Web) to
secure default status for its search engine. Google
may also disincentivize counterparties from
dealing with competitors and require placement of
Google Apps in prime device positions
UPDATE. Google was also being sued in 38 states by attorney generals regarding its Google Play Store policies
on app distribution and in-app payments. In December 2023, Google agreed to pay $700 mm and alter its Play
Store policies. The settlement blocks Google from enforcing agreements requiring mobile device makers to
preload or feature the Play Store exclusively on home screens; requires Google to make it easier for users to
install apps outside the Play Store; and requires Google to permit developers to steer users to alternative
purchase methods, including buying apps directly from websites. This settlement could preempt any relief the
judge might order in the Epic vs Google case, discussed on the next page. Note that this agreement is unrelated
to the products and allegations in the DoJ lawsuit cited above, and those in a separate Texas-led AG lawsuit.
2
The original suit also accused Google of blocking vertical service providers like Yelp and Expedia from appearing
towards the top of search result pages. In August, the judge ruled that there was no evidence of anticompetitive
harm and that the allegation relied almost entirely on the opinion and speculation of plaintiff’s expert
10
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
In addition to Federal and State lawsuits, Google was also sued by Epic Games for engaging in anticompetitive
conduct in Android markets. In December, a jury ruled against Google. This came as a surprise to me since in
a lawsuit that Epic filed against Apple, a judge ruled that Apple’s behavior was not a violation of antitrust rules.
Here are some key takeaways from the Epic vs Google ruling.
•
Google is an open-source model; it doesn’t sell an integrated product like the iPhone and instead enters
into contractual relationships with device makers like Samsung
•
As part of these relationships, (a) Google pays device manufacturers to only ship phones with the Google
Play Store and not other App stores, with payments to manufacturers taking the form of revenue shares in
Google Play; and (b) Google requires apps listing in the Google Play Store to exclusively use Google Play
Billing services to process payments and in-app purchases
•
This kind of “shelf space” behavior is not a priori anticompetitive; it has to be proven that the company also
has control over “the market”, that the shelf space behavior substantially impaired competition, and that
there are no countervailing procompetitive justifications. Epic was successful in convincing the jury that the
Google ecosystem is a market unto itself, separate and distinct from Apple’s iOS ecosystem (presumably
since switching costs are high). Once a company is determined to have market power, its contracts and
incentives can be evaluated in the context of anticompetitive behavior
•
Epic also claimed anticompetitive “tying” which the jury agreed with; it ruled that Google’s conduct was
anticompetitive and that there is no “procompetitive” business rationale for Google to require app
developers to transact only through Google Play Billing services
Why did Apple prevail while Google did not? The answer might surprise you. In Epic vs Apple, the judge did
find that Apple possessed market power over “mobile game transactions” (iOS plus Android) since Apple has a
52%-57% share of this market, and charges “supracompetitive commissions” that result in a 75% operating
margin. The court also found that Apple’s App Store restrictions do reduce competition and do stifle
innovation3. So why on earth did Apple prevail? Apple was able to prove to the court that it had sufficient
procompetitive justifications for the way its closed ecosystem works. The court agreed with Apple for reasons
related to reasonable exploitation of intellectual property, a distinct user experience and better user privacy/
security; the 9th Circuit Court then affirmed this ruling
•
Another difference: the Epic vs Google judge concluded that Google suppressed and/or destroyed evidence,
and that the jury could draw an adverse inference on the merits as a result. These kinds of instructions can
heavily impact a jury’s disposition towards a defendant
Annual app and game revenue
Estimated available apps and games
US$, billions
Count, millions
4.0
$90
$80
iOS App Store
$70
3.5
Google Play Store
3.0
$60
2.5
$50
2.0
$40
$30
Google Play Store
$20
1.0
$10
0.5
$0
2016
2017
2018
2019
2020
Source: Business of Apps, JPMAM, Q2 2023
3
2021
2022
iOS App Store
1.5
0.0
2009
2011
2013
2015
2017
Source: Business of Apps, JPMAM, Q2 2023
2019
2021
2023
Ninth Circuit Court of Appeals, Epic vs Apple, April 24, 2023, Section 2
11
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
As a reminder, civil cases are tried before a judge when plaintiffs only seek injunctive relief. If plaintiffs seek
damages as well, they’re entitled to a jury trial. That’s why Epic vs Apple went before a judge (only injunctive
relief was being sought) while Epic vs Google went before a jury (damages were sought as well). Since judges
provide legal opinions for their rulings, they can be overturned on matters of law; such appeals are harder in
jury trials since juries don’t provide legal opinions, only verdicts, and they usually can only be overturned if the
judge’s instructions were faulty. In any case Google will probably appeal, perhaps aiming to get the case into
the 9th Circuit Court of Appeals that decided the Epic vs Apple case in Apple’s favor.
Let’s keep going with the FTC/DoJ lawsuits:
• META. The primary focus of the FTC lawsuit against Meta: its acquisitions of Instagram and WhatsApp. The
lawsuit is scheduled to take place in 2024. The FTC still has to prove the existence of a “personal social
networking market” for purposes of antitrust enforcement, which is no simple task. The negative consumer
welfare aspects of this case are also less apparent than in other antitrust cases. That said, if the FTC prevails,
it could have a chilling impact on the tech industry since the FTC may challenge other prior acquisitions
• The FTC has been permitted by the courts to modify a prior consent order against Meta stemming from the
$5 bn fine related to the Cambridge Analytica fiasco from the 2016 election. While the FTC modified its
order to prevent Meta from monetizing data from users below 18, this demographic might not represent a
large source of Meta revenue. On monetization restrictions: Morgan Stanley estimates that when users in
some jurisdictions opt out of having their data tracked and monetized, subscription revenues they pay can
be even higher than their per capita monetization value
• AMAZON. The FTC and 17 state attorney generals filed an antitrust lawsuit in September 2023 alleging that
Amazon maintained monopoly power by making it harder for competing platforms to attract customers and
sellers by (a) restricting eligibility to preferred placement in front of Prime customers only to sellers using
Amazon’s fulfillment service, and (b) utilizing anti-discounting tactics to punish sellers for offering lower
prices on other platforms. The FTC has an uphill battle to prove that Amazon maintains a monopoly; it has
a ~40% share of US e-commerce but less than 25% of retail sales are online, suggesting Amazon has only a
~9% share of retail sales
• T-MOBILE is set to face an antitrust lawsuit related to its 2020 acquisition of Sprint. In November, a US
district judge ruled in favor of a class action suit filed by AT&T/Verizon subscribers on behalf of consumers.
The judge stated that plaintiffs demonstrated plausibility that the $26 billion merger “reduced competition
in the retail mobile wireless market and as a result, market participants AT&T and Verizon charged higher
prices than they would have otherwise”4. The proposed class action seeks a range of penalties, including
undoing the 2020 T-Mobile/Sprint merger and recovering overcharged amounts
• Ongoing FTC/DoJ antitrust investigations include LiveNation, RealPage (apartment listings), Visa and several
M&A deals: United Healthcare/Amedisys, Kroger/Albertsons, Exxon/Pioneer and Chevron/Hess
All things considered, 2024 looks like a make or break year for DoJ and FTC efforts to constrain what it sees
as monopoly power in the digital world.
Another legal issue: in late December the NYT sued OpenAI, alleging that OpenAI unlawfully uses NYT articles to train
its dataset, encodes copies of them in its parameters and outputs memorized articles in response to queries. While the
third issue has reportedly been fixed according to Arvind Narayan at Princeton, the other two cannot be “patched away”
by future OpenAI revisions and will require judicial or legislative interpretation of “fair use” doctrine to resolve.
The fair use doctrine ultimately rests on two questions: (a) do AI tools mostly avoid replicating materials they absorb
and instead produce new works, and (b) does AI output hurt commercial markets for the original works. In 2013 when
the Authors Guild sued Google for scanning more than 20 million books and showing brief book sections in response to
user searches, a judge ruled that Google’s conduct was fair use since it was “transformative”. Google also provides
factual information about the books and links to them as well, which OpenAI does not do. Large language model training
opens up a new frontier in fair use doctrine adjudication and will have to be resolved without much precedent.
4
US District Court for the Northeastern District of Illinois, Judge Thomas Durkin, November 2, 2023
12
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
European and Japan equities: two ships passing in the night
I’m on strike regarding a long section on European equities, particularly after another year of underperformance
vs the US. Even though Europe trades close to a record P/E discount, Europe underperformed the US again in
2023 by 7%. So, despite a recovery in Japanese equities and continued subpar returns in China, the barbell**
eked out a small positive return again in 2023. The barbell has outperformed in 84% of all three-year rolling
periods since 1991 with an average positive return of 3.0% compared to an average return of -1.2% when it
does not work. Vive le barbell!
** The barbell: for over 15 years I have written about a strategy in global equity portfolios to overweight the US
and Emerging Markets and underweight Europe and Japan. The pro forma excess returns are illustrated below
Overweight US & EM, underweight Europe & Japan
Europe P/E discount vs US
3-year rolling out (under) performance vs MSCI All World Index
Relative P/E discount based on forward earnings
10%
0%
8%
-5%
6%
-10%
Bloomberg
Datastream
4%
-15%
2%
-20%
0%
-25%
-2%
-4%
1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021
Source: Bloomberg, JPMAM. December 2023. All equity portfolio,
rebalanced quarterly. O/W US by 10%; U/W EUR by -10%; U/W JPN by 5%; O/W EM by 5%. Assumes no currency hedging. Past performance is
not indicative of future results
-30%
-35%
-40%
2006 2008 2010 2012 2014 2016 2018
Source: Bloomberg, Datastream, JPMAM, Dec 1, 2023
2020
2022
Regarding Japan: corporate governance reforms and other policies create a better foundation for investing.
• As shown in the table, there’s a lot of room for Japan to “equitize” further
• The exit from deflation has made cash less attractive vs equities for Japanese pensions and households (real
short term interest rates are -2%)
• The Tokyo Stock Exchange has threatened to delist companies trading below book value unless they enact
governance reforms
• There are over 50 activist funds in Japan which is unprecedented, and they’re pummeling the corporate
sector with governance proposals
• The share of companies with more than 50% independent external directors has risen from 30% to 60%
• There are tax incentives for households to increase equity allocations, and there’s pressure on Japanese
pensions to align equity allocations higher to match the Government Pension Investment Fund
Japan finally exits deflation
Room for Japan to "equitize"
Japan CPI ex fresh food and energy, % y/y
US
Japan
70%
30%
6%
Cash % of market capitalization
7%
21%
5%
Share of companies trading
below book value
4%
50%
10 year dividend payout ratio
Corporate buybacks as % of
market capitalization
7%
4%
3%
2%
2.0% - 3.5% 0.7% - 1.4%
Household equity allocation
40%
11%
Pension equity allocation
40%
25%
Household cash allocation
15%
55%
Source: Bridgew ater, JPMAM, December 2023
1%
0%
-1%
-2%
1980
1985
1990
1995
2000
2005
2010
2015
2020
Source: Bloomberg, JPMAM, November 2023
13
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
The exhibits below illustrate how Japan was mostly a value investment in 2023 that is regaining traction with
international investors. Note the strong performance of Japan’s value factor in the table; in other words,
investors anticipate that Japan’s low price/book companies will take steps to increase shareholder value. Global
investor underweights to Japan still exist but are modest at ~1% in the context of a global equity portfolio5. The
cheapness of the Yen may be a potential tailwind for investors as well.
To be clear, Japan is still a very slow-growing economy with a lot of demographic and competitive pressures.
Growth in 2023 was still dominated by exports rather than by domestic consumption, real wage growth is still
negative, its industrial production growth is no different than Europe, and China has now eclipsed Japan as the
world’s largest auto exporter. According to the Bank of Japan, the country’s potential growth rate is still less
than 1% due in large part to unfavorable demographics. Our improved outlook for Japan equities is based
mostly on a one-time exit from deflation combined with additional boosts from corporate governance and
investment incentive policies. I doubt that will end up being a rationale that lasts for several years.
Japan YTD cumulative overseas investor inflows by year
JPY, trillions
¥16
2013
2023
2012
2010
2019
2017
¥14
¥12
¥10
¥8
¥6
¥4
¥2
¥0
-¥2
-¥4
0
10
20
30
40
50
Week
Source: JP Morgan Securities Japan, QUICK, JPMAM, November 30, 2023
Japan, US and Europe major equity factor returns, 2023 YTD
Japan
US
Europe
Price-to-earnings
33%
-8%
2%
Price-to-book
30%
-4%
-3%
Dividend yield
5%
-17%
9%
Return on equity
13%
-14%
0%
Return on assets
4%
-1%
-6%
Earnings per share growth
1%
15%
9%
Revision Index
-3%
20%
6%
EPS revision (1m)
0%
3%
6%
Market cap
12%
13%
-2%
Beta
1%
7%
-6%
60d volatility
-2%
-7%
-2%
1m return
-3%
7%
16%
12m return
6%
-2%
-2%
Source: JP Morgan Securities Japan, QUICK, JPMAM, November 30, 2023
Global investor underweight to Japanese stocks
Japan real broad effective exchange rate
Percent, portfolio weight
Index (2020 = 100)
12%
200
190
180
170
160
150
140
130
120
110
100
90
80
70
1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024
11%
10%
9%
MSCI All World Global
Equity Index, Japan weight
8%
7%
6%
5%
4%
Actual Japan weighting in
global investor portfolios
3%
2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Source: JP Morgan Securities Japan, JPMAM, December 2023
5
Source: Bank for International Settlements, JPMAM, November 2023
“Japan Year Ahead Strategy”, JP Morgan Global Market Strategy, Rie Nishihara, December 2023
14
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Fixed income: The Low Spark of High Yield Bonds6
As illustrated earlier, many US large cap companies have been minimally impacted by rising rates. The primary
reason: S&P 500 debt is now 76% fixed compared to less than 50% in 2007. That’s why interest coverage ratios
still look good despite high levels of debt to cash flow and debt to assets. Investment grade bonds have also
benefited from an improving upgrade-to-downgrade cycle.
As for high yield, maturities are at an all-time low which increases exposure to higher rates, and spreads are not
far from the tightest levels since 2009. That said, compared to prior cycles US high yield benefits from stronger
interest coverage, a better BB/CCC mix, a lower share of private equity borrowers that are associated with lower
recovery rates, a higher share of secured debt and less use of payment-in-kind bonds. High yield energy spreads
are roughly the same as the broad HY market but reflect a more profitable universe whose weakest links have
mostly defaulted already; the BB/CCC energy mix is now 63% / 5%. So, tighter HY spreads and lower HY risks.
Current percentile rank vs history for leverage, debt service, profitability and liquidity
Interest
Net debt/ Total debt/ Net debt/ Total debt/ Interest
expense /
EBITDA
EBITDA
assets
assets
coverage
debt
US investment grade
92
55
56
100
69
15
US high yield
38
62
77
85
92
19
EBITDA
margins
Cash/
assets
69
73
23
31
Green: best credit quality
Red: worst credit quality
Source: GS Global Investment Research, November 13, 2023
S&P 500 debt composition
Credit rating upgrades are exceeding downgrades
Percent
Percent of par
15%
10%
Long-term
floating
8%
Long-term
fixed
76%
5%
0%
-5%
Short-term
fixed
10%
-10%
% Rising Stars
% Par Upgraded within HG
% Fallen Angels
% Par Downgraded within HG
Net Change
-15%
Short-term
floating
6%
-20%
-25%
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23
Source: BofA US Equity & US Quant Strategy, JPMAM, March 2023
Source: JP Morgan High Grade Credit Strategy, JPMAM, November 14, 2023
The recent era of financial repression was the longest on record, and the only period since 1830 when short
term rates were negative on a prolonged basis other than during the Civil War, WWI and WWII. While real
policy rates are still negative on a 5-year trailing basis, they are finally positive on a one-year basis. For fixed
income investors, to quote Gerald Ford and David Letterman, “our long national nightmare is over”.
Unprecedented peactime financial repression finally
comes to an end, T-bill/Funds rate less inflation, 5-year average
US corporate high yield weighted average maturity
Years
12
15%
11
10%
Current
10
5%
9
8
0%
7
WW II
2020
2010
2000
1990
1980
1970
1960
1950
1940
1930
1920
1890
1880
1870
1860
2023
1850
2019
1840
2015
1830
-10%
1910
WW I
1900
5
4
1987 1991 1995 1999 2003 2007 2011
Source: Bloomberg, JPMAM, December 26, 2023
Civil
War
-5%
6
Source: FRB, Robert Shiller, GFD, BLS, JPMAM. 2023.
6
This title refers to the low level of high yield bond spreads and is a reference to the song “The Low Spark of
High Heeled Boys” by Traffic, 1971
15
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Sources of credit stress in the US: regional malls and office within commercial real estate; subprime auto and
credit cards in the household sector; and falling interest coverage/more restructurings in leveraged loans.
What’s notable is how low delinquency rates still are in hotels, retail ex-malls, multifamily and industrial.
CMBS delinquencies by property type
Special servicing rates for office and non-office CMBS loans
Percent
Percent
25%
20%
15%
10%
16%
Regional malls
Retail
Hotel
Retail excl. regional malls
Office
Multifamily
Industrial
14%
12%
Office
Ex-Office
10%
8%
6%
4%
5%
2%
0%
2001
2004
2007
2010
2013
Source: Moody's, JPMAM, November 2023
2016
2019
2022
0%
2002
2005
2008
2011
2014
2017
2020
2023
Source: JP Morgan CMBS Research, November 2023
Interest coverage for B- rated issuers in the US loan market US leveraged loans amendments and extensions
Percent
Count
100%
550
90%
500
80%
450
Above 1.5x
400
70%
350
60%
300
50%
40%
250
Between 1.0x-1.5x
200
30%
150
20%
10%
YTD
Nov '23
100
Below 1.0x
50
0
0%
Jan-22
Jun-22
Sep-22
Dec-22
Source: Moody's Investors Service, December 2023
Dec-23
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23
Source: LCD, Pitchbook, JPMAM, November 2023
US 90+ days loan delinquency transition rates
Percent
6%
5%
4%
Subprime auto loans
Credit cards
Auto loans
First mortgage
Second mortgage
3%
2%
1%
0%
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: Experian, S&P Dow Jones Indices, JPMAM, July 2023
16
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Fixed income monitor. The big question for 10-year Treasuries: next stop 3.5% or 5.5%? I believe they will
fluctuate between 4% and 5% in 2024, but if they break out I suspect it would be to 5.5%. North of 4.5%, they
offer decent value to long term investors.
US Treasury yields
US Municipal yields
Sovereign bond 10 yr yields
Yield, percent
Yield, percent
Local currency yield, percent
7%
8%
US Treasury bill (3m)
6%
10-year US Treasury
7%
6%
5%
6%
Europe
China
5%
4%
5%
4%
3%
4%
3%
2%
3%
2%
1%
2%
1%
0%
2000
Long duration munis(20+)
Municipals 1-17
0%
1%
0%
2000
Source: Bloomberg, JPMAM, December 26, 2023
Source: Bloomberg, JPMAM, December 26, 2023
-1%
2000
2005
2010
2015
2020
Source: Bloomberg, JPMAM, December 26, 2023
30 year mortgage - 10 year Treasury
AAA asset backed securities spreads
Sovereign bond 10 yr yields
Basis points
Basis points, spread versus Treasury
Local currency yield, percent
350
350
13%
2007
2014
2021
300
2005
2010
2015
2020
CRE
Auto
Credit cards
300
250
250
200
12%
11%
South Africa
Mexico
10%
200
9%
150
8%
7%
100
6%
150
50
5%
4%
2006 2009 2012 2015 2018 2021 2024
100
2005
2010
2015
2020
Source: Bloomberg, JPMAM, December 26, 2023
'98
'02
'06
'10
'14
'18
'22
Source: Dataquery, JPMAM, December 26, 2023
Source: Bloomberg, JPMAM, December 26, 2023
Floating rate instruments (USD)
Preferred option adjusted spread
US preferred yields
Yield, percent
P0P1 index, basis points vs UST
Yield to worst, percent
10%
US Inv grade
9%
Corp FRNs
8%
AA Bank CP
7%
6%
5%
4%
3%
2%
1%
0%
2000
2005
2010
2015
2020
Source: Bloomberg, JPMAM, December 26, 2023
800
11%
US HY Preferred
10%
US HG Preferred
0
US investment
grade preferred
stock
700
600
500
9%
8%
7%
400
6%
300
5%
200
4%
100
3%
0
2000
2005
2010
2015
2020
Source: Bloomberg, JPMAM, December 26, 2023
2%
2010
2013
2016
2019
2022
Source: Bloomberg, JPMAM, December 26, 2023
CRE commercial real estate; CP commercial paper; FRN floating rate notes
17
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
US investment grade corp spreads
Emerging markets dollar bonds
US high yield bond spreads
JULI index spread vs UST, basis points
Spread vs US Treasuries, basis points
JPDFHYI index spread vs UST, basis points
400
1,000
1,400
350
900
300
1,000
700
250
600
200
500
150
400
800
600
400
300
100
50
2000
1,200
800
200
2005
2010
2015
2020
Source: Bloomberg, JPMAM, December 26, 2023
100
2002
2007
2012
2017
2022
Source: Bloomberg, JPMAM, December 26, 2023
200
1995 2000 2005 2010 2015 2020
Source: Bloomberg, J.P. Morgan HY Team,
December 26, 2023
US high yield energy bond spreads
US leveraged loan prices
Pan European high yield
JPDFENER index spread vs UST, bps
SPBDALB index
Yield, percent
2,500
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
0
1995 2000 2005 2010 2015 2020
Source: Bloomberg, J.P. Morgan HY Team,
December 26, 2023
105
60
2000
2005
2010
2015
2020
Source: S&P/LSTA, Bloomberg, Dec 26, 2023
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2000 2005 2010 2015 2020 2025
Source: Bloomberg, JPMAM, December 22, 2023
European "CoCo" preferreds
Sovereign bond 10 yr yields
Single asset single borrower
Yield to worst, percent
Local currency yield, percent
Basis points, spread versus Treasury
10
9
CoCo (ICE/BofA)
8
7
6
5
4
3
CoCo (JPM)
2
1
0
2014 2016 2018 2020 2022 2024
Source: Bloomberg, JPMAM, December 26, 2023
17%
800
100
95
90
85
80
75
70
65
15%
Brazil
13%
700
600
500
11%
9%
400
300
7%
200
5%
100
3%
2006 2009 2012 2015 2018 2021 2024
Source: Bloomberg, JPMAM, December 26, 2023
Office BBB
Office A
Office AA
Office AAA
0
2015
2017
2019
2021
2023
Source: Dataquery, JPMAM, December 26, 2023
The European Contingent Capital chart shows two series on yield to worst, one from ICE/Bank of America and
another from JP Morgan. The ICE/BofA series includes Emerging Market issuers as well as subordinated T2
issues, while the JPM series is just Europe and only includes preferreds that qualify as AT1 capital.
18
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
US Debt Sustainability: The Boiling Frog
The deterioration of the US budget deficit from 2018 to 2023 was hardly unique; other developed country
deficits rose sharply as well. The problem for the US is the starting point; every round of fiscal stimulus brings
the US one step closer to debt unsustainability. I don’t think we’re there otherwise we wouldn’t recommend
long duration US government bonds. We also wrote last year on how there has been no material change in the
dollar’s role as reserve currency7. However, we’re accustomed to deteriorating US government finances with
limited consequence for investors, and one day that may change (the boiling frog analogy).
Entitlement spending, mandatory outlays and net interest
payments vs revenues, % of GDP
Estimated change in general government deficit as % of
GDP, Percent, FY2024 vs FY2018
1%
-3%
-4%
Spain
Canada
Japan
UK
Italy
US
India
France
China
Australia
-2%
Germany
-1%
24%
Russia
0%
26%
Entitlements + Other Mandatory
Outlays + Net Interest
22%
20%
18%
16%
Revenues
14%
12%
10%
8%
-5%
-6%
Source: IMF, JPMAM, November 2023
6%
4%
1965
1975
1985
1995
2005
2015
2025
Source: Congressional Budget Office, JPMAM, June 2023
2035
By the early 2030’s, the CBO projects that all Federal government revenues will be consumed by entitlement
payments and interest on the Federal debt. Sometime before this happens, I expect a combination of market
pressure and rating agency downgrades (which have already begun) to force the US to make substantial changes
to taxes and entitlements. Some likely policies appear in the text box. A wealth tax is also a possibility; there’s
an active Supreme Court case that might impact its constitutional feasibility (Moore vs United States, which is
related to the constitutionality of the Mandatory Repatriation Tax in the 2017 tax bill). What’s not in the text
box? Further cuts to discretionary spending, since the US has run out of road on that one. In the CBO’s recent
publication on deficit reduction options8, the benefit from reducing non-defense discretionary spending was
the smallest on the CBO list since it has been cut so much already.
Policies to raise revenue
• Eliminate or raise the cap on income used to compute
Social Security contributions, or raise payroll tax rate
• Lifetime/means-tested cap on 401k contributions
• Further limits on itemized deductions (i.e., mortgages)
• Federal tax on municipal bonds for AGI > $250k
• Unify capital gains and income tax rates at higher
level for AGI > $250k
• Value added taxes, carbon taxes
Policies to reduce entitlement spending
• More gov’t price-setting on drugs/treatments within
Medicare/Medicaid
• Higher Medicare co-pay and deductibles for everyone
• Means-test Medicare outlays based on lifetime income
• Caps on Medicaid spending
• Higher Medicare eligibility age and/or Social Security
retirement age
• Chained CPI for Social Security benefit payments
Source: CBO, JPMAM, 2023. AGI = Adjusted Gross Income.
7
“Oh, The Places We Could Go”, Eye on the Market, April 26, 2023
8
“Options for Reducing the Deficit, 2023 to 2032”, Congressional Budget Office, Volume 1
19
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
The remainder of this section walks through exhibits we maintain on the Federal debt
•
The jump in the Federal debt as a % of GDP due to COVID stimulus
•
The rise in gross and net interest expense, with forecasts showing that net interest expense may reach new
post-war highs in the next few years, and exceed defense spending for the first time since the 1990’s
•
The anticipated deterioration in the budget deficit out to 2030
•
The budget deficit vs the unemployment rate, highlighting how unusual it is to have a large fiscal deficit at
a time of full employment
•
Two projections for the primary (ex-interest) deficit. While the CBO expects the primary deficit to remain
flat, a series of downside events could result in a lower trajectory
Interest expense
Debt held by the public
% of GDP
Percent of GDP
130%
120%
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
1970
1980
1990
2000
Source: CBO, JPMAM, May 2023
May '23
CBO
Jan '20
CBO
5.5%
Gross Interest
Net Interest
Nov '23 JPM
May '23 CBO
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
2010
2020
2030
1.0%
1962
1972
1982
1992
2002
2012
2022
2032
Source: BEA, CBO, US Treasury, JPMAM, November 2023
US budget balance vs unemployment rate
Budget deficit
Surplus (deficit) % of GDP
Percent of GDP
4%
Percent
5%
0%
Budget balance
2%
0%
3%
-5%
6%
0%
-2%
-4%
-10%
Unemployment
rate
9%
-6%
-15%
-8%
12%
May '23 CBO
-10%
1970
1980
1990
2000
Source: CBO, JPMAM, May 2023
2010
2020
2030
-20%
1969
1979
1989
1999
Source: Bloomberg, JPMAM, November 2023
15%
2009
2019
Primary budget balance (ex. interest)
% of GDP
6%
4%
2%
0%
May '23 CBO
-2%
-4%
-6%
Downside
JPM Nov '23
-8%
-10%
-12%
-14%
1985
1995
2005
2015
2025
Downside primary deficit catalysts:
• Lower revenue than CBO projections even after Tax
Cuts and Jobs Act cuts expire
• Discretionary spending above CBO projections that it
grows in line with inflation, possible due to defense
• More frequent federal disaster funding
Source: BEA, CBO, US Treasury, JPMAM, November 2023
20
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
•
Treasury bond issuance has been below its normal relationship with the budget deficit, and the T-Bill share
of issuance is rising; both suggest that the bond share of financing may increase in 2024
•
Treasury demand from the Fed is scheduled to keep shrinking, and demand from US banks has been weak
since many are overloaded with underwater bonds purchased at lower rates
Bond issuance vs budget deficit
US T-Bill share of US debt
Percent of GDP
Percent
20%
35%
18%
16%
Budget deficit
Net bond issuance
30%
14%
25%
12%
10%
20%
8%
15%
6%
4%
10%
2%
0%
2005
Source: US Treasury, JPMAM, November 2023
5%
1995 1998 2001 2004 2007 2010 2013 2016 2019 2022
Source: US Treasury, JPMAM, November 2023
Federal Reserve balance sheet
Bank purchases of treasuries
Percent of GDP
Percent of GDP
2008
2011
2014
2017
2020
2023
40%
5%
35%
4%
30%
3%
25%
2%
20%
1%
15%
0%
10%
-1%
5%
0%
1991
1996
2001
2006
2011
Source: Bloomberg, JPMAM, November 2023
-2%
2016
2021
'70 '75 '80 '85 '90 '95 '00
Source: Federal Reserve, JPMAM, Q3 2023
'05
'10
'15
'20
'25
21
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
It’s hard to believe that in 2005, the CBO projected a US budget surplus (!!) by 2012. We conclude with a chart
on how the US is an outlier with respect to its credit rating relative to its debt ratio. As explained in our piece
on the dollar (see below and following page), there are few signs that the dollar is losing its reserve currency
status. But it’s impossible to know how long this good fortune will last.
Government debt / GDP vs average credit rating
Government debt / GDP
150%
Japan 260%
125%
Canada
US
France
100%
Italy
Portugal
Belgium
UK
Spain
Germany
Austria
China
Finland
Australia Netherlands
New Zealand
50%
Ireland
Switzerland
Norway
Sweden
25%
Denmark
75%
0%
AAA AA+
AA
AA-
A+
A
Timeline of reserve currencies or
dominant trade currencies (years are
approximate):
• Rome: 1st century BC – 4th century AD
• Byzantine empire: 5th century
• Arabian Dinar: 7th to 10th centuries
• Florence: 13th to 15th centuries
• Portugal: 1450 to 1530
• Iberian Union: 1530 to 1640
• Netherlands: 1640 to 1720
• France: 1720 to 1815
• UK: 1815 to 1920
• US: 1920 – to be determined
A- BBB+ BBB BBB- BB+
Average credit rating
Source: Bloomberg, IMF, JPMAM, 2022
A warning sign that you may read about: China’s falling allocation to US$ in its official FX reserves. But this
conclusion may be wrong; China’s holdings of US$ are probably pretty stable. To explain why I will cite some
excellent research from Brad Setser at the Council on Foreign Relations. Brad concludes that the dollar share in
China’s reserves has been stable since 2015 after adjusting for its Treasuries held by offshore custodians like
Belgium's Euroclear and its apparent reallocation into US Agencies. That’s the blue line in the chart below, which
tracks closely with another series estimating China’s US$ assets using IMF data (green).
Estimating China's dollar assets, US$, billions
$2,750
China's estimated US$ assets
using IMF COFER shares
$2,500
$2,250
$2,000
$1,750
China's estimated US$ assets
from TIC plus agencies and
Belgian treasuries
$1,500
$1,250
$1,000
China's holdings of US-custodied treasuries
$750
$500
Belgian treasuries
$250
$0
2008
2010
2012
2014
2016
2018
2020
2022
Source: "China Isn't Shifting Away From the Dollar or Dollar Bonds", Brad W. Setser
(CFR), October 3, 2023
22
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
From our April 2023 piece on the US dollar:
Dollar still dominates FX transactions
Foreign exchange turnover by currency
Percent
RMB
200%
175%
150%
OTH
GBP
JPY
GBP
JPY
GBP
JPY
GBP
JPY
GBP
JPY
GBP
JPY
GBP
JPY
GBP
JPY
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
125%
100%
OTH
OTH
OTH
OTH
OTH
US$ / British
pounds
US$ / Yen
US$
US$
US$
US$
US$
US$
US$
US$
2001
2004
Source: BIS. April 2022.
2007
2010
2013
2016
2019
2022
8%
10%
4%
11%
43%
75%
50%
US$ transactions
Non-US$ transactions
All others
Euro / All other
OTH
OTH
% of world transactions by currency pair
US$ / All
other
14%
89%
25%
23%
0%
US$ / Euro
Source: BIS. April 2022.
The international role of the US dollar
Share of global foreign exchange reserves by currency
Percent
Percent
RMB
100%
Cross-border loans
90%
Intl. debt securities
Other
AUD
CAD
CHF
JPY
GBP
EUR
80%
FX transaction volume
70%
Official FX reserves
60%
50%
Trade invoicing
40%
SWIFT payments
30%
World trade
US$ share of global markets
Of which: offshore
US share
Global GDP
0%
20%
40%
Source: BIS Quarterly Review. December 5, 2022.
60%
80%
100%
US$
20%
10%
0%
US$ 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023
Source: International Monetary Fund, JPMAM, Q3 2023
23
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
US Consumer: Still going strong but gradually running out of ammunition
The holiday spending season started off with a bang last November with online sales up 7.5% on Black Friday
and up 9.5% on Cyber Monday. US consumer spending consistently surprised to the upside in 2023, a reflection
of tight labor markets, a wealth effect from rising equity and home prices, and excess savings which are still
being drawn down. The fourth chart shows estimates from different groups within JP Morgan regarding
exhaustion of excess savings; this compares to a San Francisco Fed estimate of “sometime in the first half of
2024”9. When excess savings run out, consumer spending will likely slow.
Real personal consumer spending
Wealth relative to pre-pandemic level
Index, (100 = Q4 2019)
Index (100 = Q4 2019)
110
105
135
US
US
130
JPN
125
EMU
100
UK
EMU
120
115
UK
95
JPN
110
90
105
85
80
2019
100
2020
2021
2022
2023
2024
95
2019
2020
2021
2022
2023
Source: National sources, JP Morgan Economics, JPMAM, Q3 2023
Source: National sources, JP Morgan Economics, JPMAM, Q3 2023
Saving rate deviation from pre-pandemic levels
Estimates of US household excess savings
%-pt deviation from 2019 average
US$, billions
10%
$2,500
8%
JPN
4%
2%
EMU
0%
US
-4%
2021
2022
2023
Source: BEA, COJ, Eurostat, ONS, JP Morgan Economics, JPMAM, Q3 2023
9
$1,500
$1,000
$500
UK
-2%
-6%
2020
JPM Private Bank
JPM Economics
JPM Investment Bank
$2,000
6%
2024
$0
-$500
2020
2021
2022
2023
2024
Source: J.P. Morgan, September 2023
“Data Revisions and Pandemic-Era Excess Savings”, Federal Reserve Bank of San Francisco, November 8, 2023
24
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
So far, delinquencies are rising for subprime auto and credit cards although only the former is breaching new
all-time highs. Mortgage and prime auto delinquency rates are still quite low. Household interest costs are
rising but from very low levels, in part since US consumers locked in very low mortgage rates below 4%.
US 90+ days loan delinquency transition rates
US 90+ days delinquency transition rates
Percent
% of current balances, annualized
6%
Subprime auto loans
Credit cards
Auto loans
First mortgage
Second mortgage
5%
4%
12%
10%
8%
Credit cards
6%
3%
4%
2%
Auto loans
2%
1%
Mortgages
0%
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: Experian, S&P Dow Jones Indices, JPMAM, July 2023
0%
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: Federal Reserve Board of New York. Q3 2023. Delinquency rates as
% of balance are a 4 quarter sum.
Household interest costs
US household debt
Percent of disposable personal income
Percent
7%
14%
6%
Mortgage interest cost
12%
4%
11%
12%
Debt service to
disposable income
13%
5%
3%
Percent
11%
10%
9%
8%
7%
Consumer interest cost
2%
1%
1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
Source: BEA, JPMAM, Q3 2023
10%
6%
Average rate on
outstanding mortgages
9%
8%
1980
5%
4%
3%
1985
1990
1995
2000
2005
2010
2015
2020
Source: Bloomberg, BEA, JPMAM, Q3 2023
25
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
There are some cracks in the consumer such as weak readings on surveys of buying conditions for durables,
vehicles and homes, and a weak survey of household financial conditions. Despite low unemployment rates and
rising wages, households are grumpy and the third and fourth charts may explain why: while personal income
has risen above its 2015-2019 trend, in real terms households have been getting crushed by inflation that is now
just beginning to subside. A collapse in home affordability could be playing a role as well in sentiment.
US buying conditions
Current financial situations vs one year ago
Net percentage of consumers who think it's a good time to buy
UMich Index Score (% Favorable - % Unfavorable + 100)
80%
150
60%
140
130
40%
120
20%
110
0%
100
-20%
90
80
-40%
Household durables
Vehicles
Houses
-60%
-80%
2000
70
60
Source: University of Michigan, JPMAM, November 2023
50
1978 1983 1988 1993 1998 2003 2008
Source: Bloomberg, JPMAM, November 2023
US nominal disposable personal income
US real disposable personal income
US$, trillions
US$, trillions
$23
$19
2003
2006
2009
2012
2015
2018
2021
2024
2018
2023
Trend
2015 - 2019
$18
$21
2013
$17
$19
Trend
2015 - 2019
$17
$16
$15
$15
$13
2015
$14
2017
2019
Source: Bloomberg, JPMAM, November 2023
2021
2023
$13
2015
2017
2019
Source: Bloomberg, JPMAM, November 2023
2021
2023
26
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
China equities: all value traps come to an end…eventually
China’s roaring equity outperformance in the wake of its 2001 acceptance into the World Trade Organization is
a distant memory. China has consistently traded at lower P/E multiples than the US and most of the time at
even lower multiples than Europe. The net result: subpar performance for investors in China equities. Since
Jan 1, 2019: US large cap equities +107%, Europe equities + 58%, and China equities -17%. The December 2022
agreement between China and the US allowing the SEC access to Chinese financial statements did not improve
investor sentiment as some predicted, and neither did the post-COVID reopening. There may be more China
stimulus coming, but so far it looks modest. If you’re waiting for a policy shift in support of national champions,
you will be disappointed by China’s latest effort to curb gaming and spending incentives which drove Tencent’s
stock down by ~10% on December 22.
China has become the ultimate value trap in recent years. In my experience, most value traps eventually come
to an end. I thought we were close last year, but that was wrong. China’s massive 40% savings rates represent
potential ammunition for an equity market rebound, but there’s no catalyst yet. If anything, China has been
backsliding: the market cap share of private sector companies dropped from its peak at 55% in June 2021 to
39% in June 202310. If you had a multiyear time horizon and believed that China will eventually take demand
side or supply side steps to end its current malaise, a long position could be rewarding. After all, how many of
us thought 5 years ago that we’d be talking about an equity market renaissance in Japan today?
US, China and Europe rolling 3 year equity performance
US, China and Europe forward P/E ratio
Percent
Ratio
200%
35x
US
Europe
MSCI China
150%
US
Europe
MSCI China
30x
25x
100%
20x
50%
15x
10x
0%
5x
-50%
2004
2008
2012
2016
2020
0x
2004
2024
2008
2012
2016
2020
2024
Source: Bloomberg, JPMAM, December 26, 2023
Source: Bloomberg, JPMAM, December 26, 2023
China equity returns since January 2019
MSCI Red Chips
China ADR
HS China Enterprises
HK Hang Seng
MSCI China B Shares
MSCI P Chips
FTSE China
FTSE China Tech
-40%
MSCI China
-30%
CSI Onshore IT Services
-20%
Hang Seng Tech
0%
-10%
MSCI H Shares
10%
MSCI China A Shares
20%
CSI 300
30%
Shenz Composite
40%
MSCI Onshore China Tech
50%
Shang Composite
Total return, US$
-50%
Source: Bloomberg. Dec 26, 2023. Blue: MSCI subcomponent. Gold: Index.
10
China’s equity alphabet soup
MSCI China: A/H/B shares, Red Chips, P Chips and ADRs
A shares: incorporated in China, trading on Shanghai and
Shenzhen exchanges, accessible through Stock Connect
H shares: large/mid caps incorporated in China, listing in HK
B shares: incorporated in China trading on the Shanghai and
Shenzhen exchanges in foreign currency
Red Chips: large/mid cap Chinese companies incorporated
outside China, listed on HK exchange; generally SOEs
P Chips: same as Red Chips, not state-owned
ADRs: trading on NYSE/NASDAQ
Petersen Institute for International Economics, July 2023
27
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
China might need to do something unorthodox to jump-start its asset prices and economy, particularly with
another round of anti-China measures pending in the US, and due to bad timing for international investors
The “Select Committee on Strategic Competition Between the United States and the Chinese Communist Party”
released a 53-page report with over 100 bipartisan recommendations. The report is a sign of growing support
for higher tariffs on China, tighter restrictions on Chinese imports, more restrictions on high-tech exports to
China and prohibitions on trade with a broader group of Chinese companies. This Committee cannot pass
legislation and it’s unlikely that anything new passes before the election. But it’s a sign of what may happen
after that; the last bastion of bipartisanship in Washington are policies targeting the Chinese Communist Party.
Here’s a summary of some of the Committee’s notable recommendations11:
•
•
•
•
•
Move China to a new tariff category that results in higher tariffs
Impose duties on legacy semiconductors from China
Large public companies must annually disclose key risks related to China
Impose sanctions on China if it invades Taiwan
Ban import and exports of products and services critical to national security if entities are owned, controlled
or developed by a foreign adversary (quantum computing, biotechnology, AI, autonomous systems,
advanced energy search, space-based tech and surveillance technology)
Force divestment or ban foreign adversary-controlled social media platforms such as TikTok
Place Huawei, ZTE and other telecom vendors on the blocked entity list
Prohibit investment in Chinese companies on government sanctions and restrict investment in sectors in
which China intends to dominate
Tax capital gains and dividends from investments in Chinese companies as ordinary income (!!)
Grant the Committee on Foreign Investment in the US jurisdiction over broader types of investment
•
•
•
•
•
Bad timing: MSCI ratcheted up China’s weight in its Emerging Markets Equity Index to an all-time peak level
of 40% right before Xi’s “progressive authoritarianism” campaign was launched. In other words, index-driven
investors might have loaded up on Chinese stocks right before they crashed. The decline in China’s economic
disclosures shown in the chart on the right is not a confidence booster either.
China’s index weight, performance and policy changes
China outperformance, 28 day smooth
350%
300%
250%
China economic disclosures
China index wt
Rolling 3 yr performance of
China vs World equities (lhs)
China weight in MSCI EM (rhs)
45%
40%
35%
200%
30%
150%
25%
100%
50%
Xi's progressive
authoritarianism begins
0%
-50%
-100%
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Source: Bloomberg, JPMAM, December 22, 2023
11
20%
15%
10%
Annual number of economic indicators made available by China's
National Bureau of Statistics
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
5%
10,000
0%
0
1960
1970
1980
1990
2000
2010
Source: FT, October 21, 2022 based on CEIC/CNBS data
2020
“Congress Preparing to Get Tougher on China”, Piper Sandler, December 21, 2023
28
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Economic data. Inbound foreign direct investment fell into negative territory for the first time. While indicators
of China’s real activity and housing are improving from low levels, the Conference Board still expects GDP growth
to decline from 5% in 2023 to 4% in 2024. China’s challenge stems from misallocated investment in real estate
rather than from excess industrial capacity. Its home ownership rate peaked at ~90% and 20% of Chinese
households own more than one home. The latest data also show broad-based producer and consumer price
disinflation and continued weakness in the banking system, where net interest margins are just 1.75% compared
to 3.25% in the US. For 2024, JP Morgan China economists project a slightly higher budget deficit, small cuts in
rates and reserve requirements and programs to mitigate local government stress12.
FDI into China fell into negative territory for the first time
China real activity remains weak
US$, billions
Index
30
$120
$100
$80
Inward FDI
Outward FDI
Net FDI
25
20
$60
15
$40
$20
10
$0
5
-$20
Weighted average of ten monthly indicators to
track strength of economic activity: real estate
investment, medicine consumption, textile exports,
vehicle exports, thermal electricity production,
clean energy electricity production, ferrous metal
ores production, communication equipment &
computer production, SOE output and private
enterprise output
0
-$40
-5
-$60
-$80
1998
2002
2006
2010
Source: Bloomberg, JPMAM, Q3 2023
2014
2018
2022
China housing drag: weak state-owned land transfer fees
and residential floor space starts, Percent, y/y
-10
2015 2016 2017 2018 2019 2020
Source: Bloomberg, JPMAM, November 2023
2021
2022
2023
China consumer confidence
Index (100 = 1997)
130
80%
State-owned land use
right transfer revenue
60%
40%
125
120
115
20%
110
0%
105
100
-20%
95
-40%
Residential floor space
of newly started houses
-60%
2017
2019
2020
Source: Bloomberg, JPMAM, November 2023
2022
90
2023
85
1996
2000
2004
2008
2012
Source: Bloomberg, JPMAM, October 2023
2016
2020
China / US housing comparison
China
(peak)
US
Value of housing stock relative to
personal consumption expenditures
6.0x
2.2x
Direct real estate related activities as a
share of GDP
18%
6%
China
(peak)
US
Home price to income
ratios, mid-2023*
~40x
~10x
Home ownership rate
90%
66%
Source: Empirical Research, CEIC, NIH, Numbeo, Fed, Rogoff & Yang, 2022. * China: Shanghai, Shenzhen, Beijing, Guangzhou. US: NY, SF
China’s 430 square feet of housing stock per capita is double the levels in Europe or Japan (D. Gros/Project Syndicate)
12
“Greater China 2024 outlook: The burdens of normality”, JP Morgan Asia Pacific Economic Research
29
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
The Fats Dominoes: the impact of weight loss drugs on equity markets
GLP-1 drugs13 show substantial efficacy in treating diabetes and obesity, and preliminary data suggest that they
might also be useful in treating co-morbidities associated with obesity and even addictive behaviors/diseases
like alcoholism. Equity markets have already priced in major changes in human behaviors, with stocks prices
of insulin manufacturers and makers of alcoholic/sugary beverages and snack foods being negatively affected.
More than 100 weight loss agents are being developed to treat the diabetes and obesity marketplace. Pharma
researchers expect GLP drugs to reach $100 billion+ in global sales by 2030, even if penetration in the obesity
market remains in single digits of the eligible population. As a sign of how enthusiastic big pharma companies
are about this space, Roche just paid $2.7 billion to buy Carmot and its oral and injectable Phase 1 and Phase 2
GLP drugs in December, pre-empting Carmot’s planned IPO. Our Life Sciences Private Capital team believes that
the size of this opportunity may compel Pfizer, Bristol, Merck, AstraZeneca, GlaxoSmithKline, Sanofi, Takeda and
a slew of European and Japanese pharmas to buy their way in via venture-backed companies.
However, questions remain regarding the durability of weight loss results when treatments end, who will pay
for GLPs given their current high cost, and whether any reduction in comorbidities is significant. In this section,
we address the 7 most important GLP issues related for investors.
Who pays? ...................................................................................................................................................................... 31
How well do GLPs work for weight loss and what are their side effects? ................................................................... 32
Do GLPs reduce co-morbidity conditions? .................................................................................................................... 33
How do GLPs work, and what are the most important trials that could increase the size of the market? ............... 34
Can GLPs be used to treat addiction?............................................................................................................................ 35
What share of the GLP market will be injectable vs oral? ............................................................................................ 36
How do GLPs impact consumer behavior and equity markets? ................................................................................... 37
US average monthly total GLP-1 prescriptions
6
4
Wegovy Approval
Mounjaro Approval
Zepbound Obesity
Approval
8
Ozempic Approval
10
Victoza Approval
12
Trulicity, Saxenda Approval
Millions
T2D:
JPM
T2D:
Cowen
Obesity:
JPM
Obesity:
Cowen
2
0
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Source: TD Cowen, JP Morgan Equity Research, December 2023. Projections start in 2023.
13
GLPs refer to glucagon-like peptides. For purposes of this section, GLP also refers to similar enzymes used to
treat diabetes, weight loss and related conditions. T2D refers to Type II Diabetes. All Fats Domino images were
created by prompts entered into Dall-E.
30
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Who pays?
GLP adoption is likely to depend on expansion of coverage. There are three insurance categories to consider:
•
Private insurance benefit consultants estimate that 30%-40% of employers have plans in place to cover
Wegovy for obesity treatment and expect this figure to rise to 60%-80% in the next few years14. However,
authorization hurdles may be added as coverage expands; in other words, employees would have to try
cheaper treatments first. In addition, their coverage could be dependent on how much weight they lose,
and be time-limited in terms of coverage (despite the fact that GLP benefits fade when treatments end).
Roughly 60% of US employers are self-insured, so GLP manufacturers would probably opt to deal with the
40% of employers that pay health insurance companies. As for the health insurers, they are unlikely to
cover GLP drugs until they are paid to do so via higher premiums
Medicare is prohibited by law from covering drugs to treat obesity. While the Treat and Reduce Obesity
Act would require Part D to cover weight loss, there does not appear to be much momentum to pass it (it
has been introduced in the last 6 Congresses). The CBO is waiting for more research before concluding that
GLP coverage would result in net savings for the Federal government; to date, the CBO sees GLP coverage
as a net expense15. It’s not clear that modest reductions in cardiovascular conditions discussed on page 33
will be enough to change that view. Another obstacle: at current prices for semaglutide (Wegovy), if all
Medicare patients diagnosed as obese were treated with it, Medicare costs would increase by ~$135 bn
annually which is 94% of current Medicare prescription drug Part D spending16
Medicaid plans can opt in to weight loss drug coverage on a state-by-state basis, but prices would probably
have to come down a lot before states opt to cover it. Hep-C drug prices fell by ~70% before some states
offered it through Medicaid
•
•
How much do GLPs like Mounjaro and Zepbound cost? Pharmaceutical companies show a list price which is
around $1,000 per month. However, they negotiate discounts with insurance company payers resulting in net
costs of closer to $500 per month. As shown below (right), JP Morgan Equity Research expects the price of
these drugs to fall by one third by the year 2030. While the price of innovative drugs with little competition
often stay flat or rise, in this case some analysts believe lower prices could dramatically increase the market.
Potential user base of GLPs by coverage type
Expected GLP pricing by year
Number of people, millions
Annual cost
150
$6,500
Medicare
125
100
Medicaid
$6,000
Obesity (Zepbound)
$5,500
$5,000
75
Diabetes (Mounjaro)
50
Private insurance
$4,500
$4,000
25
No insurance
0
Type II diabetes
Source: TD Cowen, November 15, 2023
Obesity and overweight
$3,500
2024
2025
2026
2027
2028
2029
2030
Source: JP Morgan Equity Research, September 2023
14
“Examining the Broader Impact of GLP-1s”, JP Morgan Global Equity Research, October 24, 2023
“A call for new research in the area of obesity”, CBO, October 5, 2023
16
"Medicare Part D Coverage of Antiobesity Medications", New England Journal of Medicine, March 16, 2023
15
31
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
How well do GLPs work for weight loss and what are their side effects?
As per the first chart, weight loss observed in clinical trials varies by drug and dosage regimen. Other research
points to increased weight loss as a function of treatment duration; at 20 weeks, average weight loss was ~10%
and at 40 weeks, it was ~15%; after that, weight loss tends to flatline. These weight loss results compare to
25%-30% for bariatric surgery.
However, weight was mostly regained when Wegovy and Zepbound treatments ended. Similarly, other cardiometabolic improvements regressed to baseline levels after treatments ended such as blood pressure, LDL levels
and hemoglobin readings17. Each participant was provided both Wegovy and lifestyle intervention guidance
(counseling on diet and exercise every four weeks); at week 68, all forms of treatment were halted.
Weight loss observed in clinical trials
Change in body weight during and after treatment
Percent of body weight
Percent
-25%
Approved
Phase 3
Phase 1/2
-15%
-10%
-5%
0%
Retatrutide (LLY)
Zepbound (LLY)
Wegovy (NVO)
CagriSema (NVO)
Oral Semaglutide (NVO)
Survodutide (BI/ZEAL)
Oral Orforglipron (LLY)
AMG 133 (AMGN)
Mazdutide (LLY/Innovent)
Efnopegdutide (MRK)
Pemvidutide (ALT)
XW003 (Sciwind Bio)
CT-388 (Carmot)
Semaglutide (NVO)
VK2735 (VTKX)
Bimagrumab (LLY)
Efpeglenatide (Hanmi)
Oral GSBR-1290 (GPCR)
Cotadutide (AZN)
Oral Danuglipron (PFE)
Dapiglutide (ZEAL)
ZP8396 (ZEAL)
Oral INV-202 (NVO)
LY3537021 (LLY)
-20%
Source: TD Cowen, November 15, 2023
2%
Treatment
discontinued
Placebo
0%
-2%
-4%
-6%
-8%
Wegovy
-10%
-12%
-14%
-16%
-18%
0
10
20
30
40
50
60
70
80
90
100 110 120
Weeks since treatment began
Source: DOM Journal of Pharmacology and Therapeutics, April 2022
While GLP treatments are generally well tolerated, they do entail side effects which are important to monitor
• The two most frequent side effects: nausea, ranging from 20%-45% of participants in Phase II/III trials, and
vomiting which occurred in 10%-30% of participants18. Other side effects in trials included headaches,
abdominal pain, constipation, diarrhea and dyspepsia
• GLPs are also associated with rare adverse events including pancreatitis (inflammation of the pancreas)19
• Name-brand semaglutide drugs are sold in pre-filled pens with safeguards to prevent overdosing. However,
drugstores also sell their own non-FDA tested GLP compounds in concentrated form which require patients
to fill their own syringes. Calls to poison control centers have increased by people using these compounds
after overdosing on them (nausea, vomiting, headache, etc)20
• Some people taking GLPs lose muscle mass and bone density. More research may be needed to develop
weaning and discontinuation strategies to avoid these effects21
• GLPs mitigate dopamine rewards and might lead to a condition called “anhedonia” which is linked to
depression22. Such adverse effects were reported in certain GLP variations, but there was no difference in
psychiatric effects between treatment and placebo groups in Phase III semaglutide obesity trials23
17
"Weight regain and cardiometabolic effects after withdrawal of semaglutide", Diabetes, Obesity and Metabolism
Journal of Pharmacology and Therapeutics, Wilding et al, April 2022
18 “The next wave of antiobesity assets”, Goldman Sachs Equity Research, September 26, 2023
19 "Risk of Gastrointestinal Adverse Events Associated With Glucagon-Like Peptide-1 Receptor Agonists for Weight
Loss", University of British Columbia Department of Medicine, October 2023
20 CNN, December 14, 2023
21 "The Big Trial of a GLP-1 drug to reduce Major Cardiovascular Events", Eric Topol (Scripps Research), Nov 2023
22 "Hot weight loss drugs tested as addiction treatments", Science, Leslie, August 2023
23 "Case Report: Semaglutide-associated depression", Frontiers in Psychiatry (NIH), Li et al, August 2023
32
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Do GLPs reduce co-morbidity conditions?
If private and government insurance coverage does expand, it might be due to findings that GLPs also reduce
the severity of diseases and conditions associated with obesity. Around 80% of obese individuals exhibit at least
one of the co-morbidities below. The chart illustrates how the incidence of these co-morbidities rises with
obesity, with the latter measured via BMI (Body Mass Index).
Estimated rates of obesity-associated co-morbidities by BMI
Co-morbidity rate
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
BMI 25-29.9
BMI 30-34.9
BMI 35-39.9
Non-alcoholic Sleep apnea Dyslipidemia Hypertension
fatty liver
disease
Source: TD Cowen, November 15, 2023
Diabetes
BMI 40+
Osteoarthritis
Prediabetes Cardiovascular
disease
Novo’s SELECT trial assessed cardiovascular outcomes for patients taking Wegovy. The trial did show a
reduction in major adverse cardiac events (MACE) of ~20% relative to the placebo group. However, the absolute
reduction in MACE incidence was low, just 1.5% (placebo group 8.0%, Wegovy 6.5%) and it took three years of
GLP treatments to derive that absolute benefit24. In other words, there are important policy issues to sort
through regarding the MACE reduction benefit as a basis for coverage of an expensive drug. That said, the trial
did demonstrate a ~70% reduction in progression to diabetes, which is a positive finding. Novo is working with
the FDA to determine a potential basis for approving its GLP for “diabetes prevention”; the hurdle is that the
FDA requires durable gains even after patients stop taking the drug.
Major adverse cardiovascular event: semaglutide vs placebo
Primary cardiovascular composite end point
Hazard ratio (1 = placebo), error bars show 95% confidence interval
Percent, cumulative incidence
Primary CV composite endpoint
10%
Cardiovascular death
9%
All-cause death
8%
Expanded primary CV comp. endpoint
7%
Composite heart failure outcome
6%
All-cause death, heart attack or stroke
Wegovy
(Semaglutide)
5%
Nonfatal heart attack
4%
Nonfatal stroke
1.5%
Placebo
3%
Coronary revascularization
2%
Hospitalization for unstable angina
Heart failure hospitalization or urgent visit
1%
Nephropathy
0%
0
0
0.2
0.4
Source: Eric Topol, Scripps Research, November 2023
0.6
0.8
1
1.2
6
12
18
24
30
36
Months since randomization
Source: Eric Topol, Scripps Research, November 2023
42
48
Understanding the first chart
The red bars show the occurrence of each adverse outcome relative to the placebo which has a score of 1. The lines show
95% confidence intervals around the mean result. For example, the risk of a non-fatal heart attack declined by 28%
compared to the placebo group, with 95% confidence that this value lies between 15% and 39%.
24
“The Big Trial of a GLP-1 drug to reduce major cardiovascular events”, Eric Topol, Scripps Research, Nov 2023
33
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
How do GLPs work, and what are the most important trials that could increase the size of the market?
As mentioned earlier, there’s a long road ahead if Medicare adoption is contingent on legislation to explicitly
cover obesity drugs. However, analysts with much higher GLP adoption forecasts than those shown earlier
believe that if ongoing trials are successful, GLP drugs could be branded as cardiovascular drugs and/or other
treatments which Medicare already covers. Goldman projects twice as many monthly GLP users than the Cowen
and JP Morgan estimates on page 30 for this reason25.
There are currently 20+ ongoing studies which could expand the list of conditions that GLP drugs are explicitly
designated to treat, in addition to T2D and obesity:
ONGOING TRIALS
Cardiovascular
Obstructive sleep apnea
Chronic kidney disease
Advanced liver disease
Knee osteoarthritis
Alzheimer's disease
Peripheral arterial disease
Heart failure (HFpEF)
Manufacturers
Orfoglipron Survodutide CagriSema tirzepatide
Retatrutide semaglutide
oral
Lilly
Boehringer
Novo
Lilly
Lilly
Novo
Source: Goldman Sachs, JPMAM. We capitalize brand names and show molecular compounds as low er case. Boehringer
refers to a partnership betw een Boehringer Ingelheim and Zealand Pharma
GLPs appear to work through brain pathways. One notable recent GLP findings comes from Daniel Drucker at
the University of Toronto. Drucker found that GLPs work via brain pathways to reduce inflammation26. If so,
this could be a promising indicator for potential use of GLPs to treat conditions that involve inflammation such
as Alzheimer’s disease and Parkinson’s disease. Drucker notes that the reduced MACE benefits shown on the
prior page started to occur even before patients started losing weight, indicating that weight loss is not the only
contributor to reduced risk.
As a general outline, here are the ways that GLPs positively affect the body’s organs27:
•
•
•
•
•
Stomach: decrease gastric emptying and gastrointestinal motility (food movement from mouth to intestines)
Liver: decrease gluconeogenesis and steatosis (reduced liver fat, reduced non-alcoholic fatty liver disease)
Brain: decrease food intake stimuli and reward behavior
Muscle: increase insulin sensitivity and glucose uptake
Pancreas: increase insulin secretion and synthesis, decrease glucagon secretion, increase beta cell survival
25
“The Option Value of Weight Management”, Goldman Sachs Equity Research, December 18, 2023
“Ozempic and Wegovy may reduce inflammation by targeting the brain”, New Scientist, December 18, 2023
27
“Anti-obesity drug discovery: advances and challenges”, Nature Reviews, 2022, Figure 4
26
34
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Can GLPs be used to treat addiction?
GLPs affect what is referred to as “reward circuitry” in the brain by mitigating dopamine activity. As a result,
researchers are evaluating whether GLPs could be used to treat compulsive behaviors such as alcoholism and
smoking. The results are very preliminary but here’s what we know so far.
Addiction researchers found that GLPs alter reward pathways in lab animals. Rodents and primates taking GLPs
get less of a dopamine hit from alcohol, cocaine, nicotine and oxycodone:
•
In addition to reducing caloric consumption, semaglutide reduced binge-like alcohol drinking in mice28
•
GLP treatments significantly reduced alcohol consumption in monkeys29, reduced cocaine seeking in rats30,
and reduced oxycodone seeking in rats31. These must be wild experiments to actually carry out
Studies are being conducted to test anti-addiction effects of GLPs on humans, but more work still needs to be
done before drawing any conclusions:
•
In a study of 127 patients with alcohol use disorder (AUD), heavy drinking days and total alcohol intake were
significantly reduced in the subgroup of patients taking GLPs that were also obese. Additionally, when
shown pictures of alcohol, those who received treatment had significantly less activation of brain reward
centers. However, GLP treatment did not reduce drinking for other less overweight cohorts32
•
University of Texas researchers found that 46% of patients who wore nicotine patches and received
injections of GLPs stopped smoking, while 27% of people who relied only on the patches were able to stop33
Consumption of sweet alcohol by mice taking GLPs
Grams of alcohol per kg of body weight
7
6
5
4
3
2
1
0
Placebo
0.001
0.003
0.01
0.03
0.1
semaglutide dose, mg per kg of bodyweight
Source: Journal of Clinical Investigation, Chuong et al, May 2023
28
“Semaglutide reduces alcohol drinking and modulates central GABA neurotransmission”, Journal of Clinical Investigation,
Chuong et al, May 2023
29
Monkeys were given access to alcohol for 4 hours each day for 10 days (!!!), and then allocated to either the GLP or
placebo group. After a loading period of 2-5 weeks, consumption levels were measured and compared for monkeys in the
GLP and placebo groups. “Effects of glucagon-like peptide 1 analogs on alcohol intake in alcohol preferring vervet monkeys”,
University of Copenhagen, Fink-Jensen et al, October 2018
30
“Glucagon-like peptide-1 receptor activation in the ventral tegmental area attenuates cocaine seeking in rats”,
Neuropsychopharmacology, Hernandez et al, February 2018
31
Rats were allowed to lever press for injections of oxycodone for 3 hours per day. Their motivation to self-administer
oxycodone was then tested by increasing the difficulty of self-administering oxycodone for rats receiving GLPs and rats not
receiving GLPs. “Activation of GLP-1 receptors attenuates oxycodone taking and seeking without compromising the
antinociceptive effects of oxycodone in rats”, Neuropsychopharmacology, Zhang et al, February 2020.
32
“Exenatide once weekly for alcohol use disorder investigated in a randomized, placebo-controlled clinical trial”, Journal
of Clinical Investigation, Fink-Jensen et al, October 2022
33
“Exenatide Adjunct to Nicotine Patch Facilitates Smoking Cessation and May Reduce Post-Cessation Weight Gain: A Pilot
Randomized Controlled Trial”, Nicotine & Tobacco Research, Yammine et al, October 2021
35
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
What share of the GLP market will be injectable vs oral?
Oral versions of next generation GLPs could hit the market in the coming years and expand the market since
many patients prefer pills to injections, and pills are generally easier to make, store and transport. However,
oral GLPs require more of the semaglutide active ingredient per dose and may result in more side effects:
•
Rybelsus, a pill version of Novo Nordisk’s diabetes GLP treatment, underperforms injectable counterparts
with respect to weight loss (5% vs 15% for injectable version after one year34) and had a 10% discontinuation
rate in trials due to side effects
•
Oral semaglutide demonstrated weight loss results that are similar to injectable versions in a Phase III
obesity trial with 17% weight loss at week 68. However, the oral version requires food restrictions and its
efficacy is more variable
•
Eli Lilly’s Orforglipron delivered weight loss between 9%-15% by week 35 in a Phase II obesity trial and
doesn't have food intake restrictions, but nausea and vomiting were still common side effects and led to a
discontinuation rate ranging from 10%-21% depending on dosage
•
Pfizer had oral GLPs in trials (Danuglipron, Lotiglipron) which were terminated due to high discontinuation
rates in the former and liver function test abnormalities in the latter
Cowen projects that by 2030, only 15% of the GLP market for diabetes and obesity will be oral. JP Morgan Equity
Research expects a larger shift to oral GLPs, and so do a group of physicians that JP Morgan surveyed. We expect
estimates to conform once we have better data on the next generation of oral GLP drugs.
Projected oral vs injectable treatment prevalence, obesity
and T2D, Millions
Physician survey of T2D treatment type
45
45%
40
35
Oral
15%
Injectable
11%
30%
25%
25
20
15
10
5
94%
94%
94%
94%
94%
92%
89%
85%
2023
2024
2025
2026
Source: TD Cowen, November 15, 2023
20%
15%
10%
5%
0%
0
34
Existing GLPs
Next generation injectable GLPs
Oral GLPs
40%
35%
8%
30
Percent of GLP use
2027
2028
2029
2030
2026
2028
2030
Source: Survey conducted by J.P. Morgan Equity Research in Feb 2023.
“Once-weekly semaglutide in adults with overweight or obesity”, NEJM, Wilding et al, March 2021
36
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
How do GLPs impact consumer behavior and equity markets?
Let’s start with rough estimates of how consumer behavior changes when people take GLPs. JP Morgan Equity
Research analysts published estimates in an October 2023 report35. There are a lot of caveats since the sample
size was only ~500 people, but I like the approach: data scientists collect actual spending receipts of households
and scan the results. Then, they overlay whether households take GLP drugs. Changes in consumption are
shown per GLP household whether each household consumes those items or not; as a result, unit consumption
declines are even larger for the GLP households that do consume these items.
Year-on-year change in projected units of consumption by household
Category
GLP Users
Total US Difference
Meat snacks
-27%
-2%
-26%
Snack seeds, nuts, trail mixes
-31%
-5%
-25%
Popcorn
-27%
-4%
-24%
Crackers
-23%
1%
-23%
Chips
-19%
-1%
-18%
Packaged portable sweet snacks
-11%
3%
-15%
Baking & cooking
-8%
5%
-13%
Packaged cookies
-11%
1%
-12%
Soft drinks
-15%
-4%
-11%
Canned
-11%
0%
-11%
Pasta & noodles
-3%
7%
-11%
Deli & prepared foods
-12%
-2%
-10%
In-store bakery
-8%
2%
-10%
Source: JP Morgan Global Equity Research, Numerator, JPMAM, September 17, 2023
Surveys are less precise since they rely on household recall of spending behaviors. For what it’s worth, here are
the results of a survey of 311 GLP patients with BMI > 27 in the summer of 202336. The patients had been taking
GLPs for more than two weeks. Note that the survey does not measure declines in unit consumption; it simply
measures whether overall unit consumption is higher, lower or the same. Directionally, both results are
similar: less unhealthy foods and beverages.
Change in food category consumption since starting anti-obesity medication
Consuming more of
Consuming about the same
Consuming less of
Fruits and vegetables
Weight-loss management foods
Poultry and fish
Dairy products
Red meat
Rice, grains, and pasta
Instant soups and canned goods
Frozen meals
Preserved meats
Salty snacks
Alcohol
Cookies and baked products
Carbonated / sugary drinks
Confections
0%
20%
Source: Morgan Stanley AlphaWise survey, August 2023
% More % Less
+46%
+31%
+23%
-14%
-25%
-35%
-41%
-45%
-53%
-61%
-62%
-65%
-65%
-66%
40%
60%
80%
100%
35
“Examining the Broader Impact of GLP-1s”, JP Morgan Global Equity Research, October 24, 2023
36
“Thematic Alpha: Obesity”, Morgan Stanley Equity Research, October 19, 2023
37
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
In the summer of 2023, coincident with Novo Nordisk’s obesity trial results for Wegovy, the equity markets
began to price in winners and losers from increased GLP penetration. The charts below show sector examples,
with large gains in GLP manufacturers and losses in insulin manufacturers and distributors of alcoholic beverages
and snack foods (Dollar Tree, Dollar General, BJ’s Wholesale). GLP returns were almost as high as FAANGM and
AI returns in 2023 (with AI returns based on an illustrative AI ETF with 36 stocks).
Note how fast food and insulin sectors recovered later in the year. This could be a simple reflection of rising
equity markets, or it could reflect more investor caution regarding the speed of GLP adoption and impacts on
other medical conditions. There’s a lot of variability in the research community regarding adoption rates. As
one example, TD Cowen estimates that US GLP penetration for diabetes and obesity will reach 33% and 3%,
respectively, by the year 2030 with penetration being defined as the portion of potential patients taking the
drug. JP Morgan Research analysts agree on diabetes penetration (35% by 2030) but project higher obesity
penetration of 15%.
TD Cowen’s lower penetration forecast for obesity explains why they don’t believe that GLPs will negatively
impact adjacent healthcare sectors. One example: cardiovascular events that affect the obese population. The
share of obese individuals that experience such events is 13%. Based on Cowen’s 3% obesity penetration
forecast, this would only translate into 400,000 people treated with GLPs by 2030. This number of people, even
if GLPs were perfectly curative for cardiovascular disease, would only amount to a reduction of 0.5% in the
overall pool of all people suffering cardiovascular events. The same relative magnitudes appear below in the
table for other conditions, suggesting that sharp declines in share prices of adjacent condition drugs and
treatments may be very premature.
-15%
Beverages (beer)
Orthopedic devices -20%
Beverages (sugary)
Exposed food retail -25%
Insulin pumps
Beverages (spirits) -30%
0%
-20%
Beverages
-10%
Medical Devices
20%
Life Sciences
40%
0%
-5%
Biotech
GLP-1
manufacturers
Calorie
rich/fast food
Managed Care
60%
Pharma (ex-LLY)
Percent
Food
YTD relative return of large-cap stocks to
S&P 500 by sector, Percent
The GLP-1 effect on equity sectors and industries
-35%
-40%
-40%
-60%
Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23
Source: Bloomberg, JPMAM, December 26, 2023
-45%
Source: Bloomberg, JPMAM, December 26, 2023
Projected pool reductions due to obese patients taking GLPs by 2030
Non-alcoholic fatty liver disease
72%
Co-morbidity prevalence
reduction in obese GLP
patients (mm)
2.1
Obstructive sleep apnea
62%
1.8
1.1%
Chronic Kidney Disease
20%
0.6
0.5%
Osteoarthritis
18%
0.5
0.4%
T2D / Prediabetes
15%
0.4
0.4%
Cardiovascular Disease
14%
0.4
0.5%
Co-morbidity
Avg co-morbidity
rate with obesity
Reduction in total pool
size due to obese GLP
patients (%)
1.0%
Source: TD Cowen, November 15, 2023
38
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
Top ten surprises for 2024 in honor of Byron Wien
Market Strategist Byron Wien passed away last year at the age of 90. For over 30 years whether at Morgan
Stanley or Blackstone, Byron published a top ten list of surprises for the following year. I never read any of the
articles that kept score on how well Byron’s predictions did since that’s not the point. They were an exercise in
thinking against the grain about what might happen in an industry dominated by consensus. In Byron’s honor,
for one time only, here’s my list of top ten possible surprises for 2024.
[1] The US dollar remains stable. Despite all the hand-wringing about the weaponization of the US dollar via
US sanctions, the trade weighted dollar ends 2024 +/- 7% from where it began. Furthermore, the dollar will
retain its roughly 50% share of global trade invoicing.
US Fed trade-weighted nominal broad dollar index
The international role of the US dollar
Index (100 = January 1980)
Percent
450
Cross-border loans
400
Intl. debt securities
350
FX transaction volume
300
Official FX reserves
250
Trade invoicing
SWIFT payments
200
World trade
150
US$ share of global markets
Of which: offshore
US share
Global GDP
100
1980 1985 1990 1995 2000 2005 2010
Source: Bloomberg, JPMAM, December 22, 2023
2015
0%
2020
20%
40%
60%
80%
100%
Source: BIS Quarterly Review. December 5, 2022.
[2] The DoJ/FTC win a big antitrust case. After a drought of 20+ years since the Microsoft antitrust case37, the
Department of Justice and/or Federal Trade Commission win one of the big antitrust cases currently underway
against Google, Amazon, Meta or T-Mobile (see pages 9-12 for more details).
[3] President Biden withdraws sometime between Super Tuesday and the November election, citing health
reasons. Biden passes the torch to a replacement candidate named by the Democratic National Committee.
Biden has a low approval rating for a President with ~10% job creation since his inauguration, although that
figure is the by-product of his inauguration coinciding with the rollout of COVID vaccines and a reopening US
economy. See our November 2023 Eye on the Market for details on the process of candidate replacement
during the primary season or before/after the general election.
Presidential popularity and job creation
Nonfarm payrolls
Presidential approval rating, 1,051 days after inauguration
Number of employees, milions
80%
160
Eisenhower
75%
155
70%
65%
150
60%
50%
JFK
GHWB
55%
GWB
45%
Reagan
Truman
140
Nixon
Obama
LBJ
135
Biden
-2%
0%
2%
4%
6%
8%
10%
Payroll growth since inauguration
Source: 538, Bloomberg, JPMAM, December 6, 2023
Biden's
inauguration
Carter
Trump
40%
35%
-4%
145
Clinton
12%
14%
130
2018
2019
2020
2021
Source: Bloomberg, JPMAM, November 2023
2022
2023
37
The DC District Court ruled in 2001 that Microsoft's actions constituted unlawful monopolization under
Section 2 of the Sherman Act, but the US Court of Appeals partially overturned that judgment. The DoJ and
Microsoft eventually reached a settlement in which Microsoft agreed to modify some business practices
39
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
[4] The driverless car backlash is coming. In the few places where full Level 5 autonomous cars are being tested
in real world conditions (San Francisco, Austin), they have blocked ambulances on their way to the hospital,
hampered other emergency responders, caused accidents, increased congestion and run over pedestrians, one
instance of which reportedly resulted in the resignation of Cruise’s CEO. Waymo has added technology to
reportedly allow firefighters to take control of its vehicles if they stop moving.
LiDAR (autonomous vehicle technology) stocks have collapsed by 85% from their peak, and I don’t think a
rebound is imminent. I believe a possible backlash is coming from citizens who believe, as in the case of the
despised urban scooter plague38, that convenience for some results in dangers and inconvenience for others.
Tesla is experiencing problems even at Level 2, which requires driver oversight. The NHTSA investigated a series
of crashes involving Tesla autopilot and found that its methods of insuring driver compliance are inadequate
and can lead to “foreseeable misuse”. In December, Tesla issued a recall of 2 million vehicles to update the
software to require greater driver compliance.
LiDAR stock basket
Index (100 = December 2019)
700
600
Companies: Aeva, Cepton,
Innoviz, Luminar, Microvision,
Ouster, Velodyne Lidar
500
400
300
200
100
0
2020
2021
2022
Source: Bloomberg, JPMAM, December 27, 2023
2023
2024
[5] Broadly syndicated loan (BSL) losses rise above private credit losses for the first time. Historically, there
hasn’t been much difference in their loss respective rates. But after a decade of comparatively lax loan
underwriting with respect to maintenance covenants, EBITDA add-backs, maturity priming clauses, intellectual
property transfer restrictions and other terms and conditions, that will change. In other words, the underwriting
chickens come home to roost in the loan markets moreso than in private credit. See our December 5 Eye on
the Market Alternative Investment Review for more details.
Loss rate estimates on BSLs and private credit
Trailing 12-month loss rates
10%
8%
Private credit, lagged 1Q
Broadly syndicated loans
6%
4%
2%
0%
-2%
2008
2010
2012
2014
2016
2018
2020
2022
Source: Cliffwater, Moody's, GS Global Investment Research, Q2 2023
38
The scooter company Bird went public via SPAC at a valuation of $2.3 billion. Bird market cap now: $7 million
40
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
[6] Argentine dollarization will fail if implemented. Whenever the Cato Institute, American Enterprise Institute
and City Journal agree (like they do on positive prospects for Argentine dollarization), I get suspicious. Argentine
President Milei needs a two-thirds majority to pass constitutional reforms required for dollar convertibility.
Furthermore, Argentina would need substantial foreign exchange reserves and much higher savings rates to
even try it. But even if these goals were met, dollarization would fail after being implemented.
Convertibility to another currency is generally only workable in places with some combination of the following:
(a) high levels of productivity, flexibility and business dynamism to allow the economy to absorb domestic and
external shocks; (b) white knight lenders such as the ECB and European Commission; and/or (c) substantial
commodity related foreign exchange reserves to defend the currency peg when needed. Argentina has none
of these attributes, and while Milei is trying (see box), I doubt he will be able to sufficiently de-Peronize
Argentina. Dollarization would yield to de-dollarization in a fairly short period.
Institutions, labor market flexibility, business freedoms and business dynamism
Score, 0-100 (100=highest)
65
60
55
50
ARG
75
70
Currency pegs to the US$
HKG
80
Largest economies
UAE
BHR
QAT
PAN
OMN
JOR
SAU
MOR
85
USA
UK
CAN
AUS
DEU
JPN
KOR
FRA
ESP
ITA
CHN
MEX
IND
IDN
SAU
RUS
BRA
90
45
40
Source: World Economic Forum, World Bank, Fraser Institute, WSJ, JPMAM, 2023
Milei proposals/milestones so far
• Privatization of airlines, energy, rail, media,
water and sewer
• $20 billion cuts in public spending
• Liberalize energy prices, food prices, labor
markets and healthcare prices
• Eliminate 9 out of 18 ministries
• End incentives for industrial development
in disadvantaged areas
• Fire 5,000 government employees
• No restrictions on foreign land purchases
• Legalize crypto for contract payments
[7] Russian invasion of Ukraine drags on with no ceasefire in 2024. Despite Russia reportedly losing 87% of its
prewar active troops (315,000 killed or injured) and two-thirds of its tanks39, there is no ceasefire and the war
drags on for another year. Some US financial support for Ukraine is maintained after Democrats agree with the
GOP to provide greater funding for US border security given surging cross-border crossings coinciding with an
election year. Russia’s prosecution of the war finally pushes Europe to spend 2% of GDP on defense, which is
what Europe agreed to in the 2006 NATO agreement but hasn’t been adhering to. According to our calculations,
Europe has underspent on its own defense by $2.0 trillion since 1983, relying on the US to spend instead40.
Total US Customs and Border Protection Enforcement
Actions, Number of actions, millions
US vs European defense spending
3.5
10%
3.0
2.5
2.0
Percent of GDP
9%
8%
7%
6%
5%
1.5
4%
1.0
3%
2%
NATO ex US
USA
NATO defense spending
agreement target
0.5
1%
0.0
0%
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023
2017
2018
2019
2020
2021
2022
2023
Source: US CBP, JPMAM, FY 2023 (October 2022 - September 2023)
Source: World Bank, SIPRI, Federal Reserve, JPMAM, 2022
39
NYT and WSJ, December 12, based on a declassified US intelligence report given to Congress
40
Eye on the Market, November 14, 2023; see page 5
41
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
[8] Despite storm clouds over US regional banks, their stocks will do well in 2024 with stable or rising price to
book values. When Silicon Valley Bank failed, US regional bank valuations temporarily converged with Europe.
Unprecedented rescues by the Fed and FDIC then slowed deposit outflows. Despite challenges related to
underwater Treasuries, commercial real estate writedowns, competition for deposits and slowing loan growth,
US regional bank price to book ratios remain at 1.0x or higher in 2024 and widen the gap vs Europe.
US regional banks vs European banks
Price to book ratio
1.8x
US Reg (KBW)
US Reg (S&P 500)
1.6x
1.4x
1.2x
1.0x
EU (MSCI)
0.8x
0.6x
0.4x
0.2x
2008
EU (Eurostoxx)
2010
2012
2014
2016
2018
2020
2022
2024
Source: Bloomberg, JPMAM, December 2023
Regional bank rescue: in some ways, unprecedented
Fed: for the first time, banks can post collateral at the Fed
and borrow 100% of par value even if the security is worth
less (Bank Term Funding Program)
FDIC: SVB depositors were bailed out despite it being a
venture capital piggy bank. SVB deposits rose and fell with
the IPO calendar; only 3% of its deposits were fully insured;
it offered venture loans in exchange for deposit exclusivity;
its average account balance was > $1 mm; its average
uninsured account balance was > $4 mm; and its top ten
depositors had $13 billion in uninsured deposits, all of
whom were bailed out despite the long history of losses
imposed on uninsured depositors in FDIC resolutions
[9] Due to retirement of dispatchable power generation (nuclear, coal, gas) and underinvestment in pipelines,
gas storage and winterization, major US cities will face electricity outages and/or natural gas outages (which
are much worse). The North American Electricity Reliability Association just released its 2023 risk assessment.
The region NERC highlights as having the greatest risk of power outages, even in normal peak conditions:
Midwest MISO, which stretches from Minnesota down to Louisiana. Outage risk in more extreme weather
conditions is cited for New York, New England and the entire Western US. NERC cites peak loads rising at “an
alarming rate” due to electrification, coinciding with increasingly intermittent new sources of generation (wind
and solar power) and 80-110 GW of nuclear and fossil fuel generation retirements by 2033 which is ~7% of
current installed capacity. Reserve margins indicate the buffer each region has to a spike in summer demand;
the chart on the left summarizes NERC’s assessment of future reserve margins. Note as well how unplanned
outages have been rising during cold weather storms.
Generation capacity buffer during peak summer demand
Anticipated reserve margin
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
ERCOT (Texas)
PJM (Mid-Atlantic)
Southeast
California
SPP (Plains)
New York
Northwest
New England
MISO (Midwest)
0%
2024
2026
2028
2030
2032
Source: "2023 Long-Term Reliability Assessment", NERC, December 2023
Peak unavailable national electricity generation due to
cold weather, Gigawatts
100
90
80
70
60
50
40
30
20
10
0
Polar Vortex
(Jan 6-8,
2014)
SW Event
(Feb 1-5,
2011)
2018 Event
(Jan 15-19,
2018)
2021 Event
(Feb 8-20,
2021)
2022 Event
(Dec 21-26,
2022)
Source: "Winter Storm Elliott Report", FERC, NERC, October 2023
42
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
If you think power outages are bad, natural gas outages would be far worse. During winter storm Elliott in
December 2022, cold weather resulted in failure of gas production wellheads, pipelines and distribution. Dry
gas production in the lower 48 states fell by 16%, with Marcellus and Utica production falling by 23%-54%. On
December 25, interstate natural gas pipelines serving Con Edison experienced drops in pressure due to
production losses and operational issues. Con Ed restored pressure from a backup LNG system until systemwide
pressure was normalized, and ended up narrowly avoiding a gas system outage.
During a gas outage, local gas distribution companies would need to go building-by-building and shut off gas
valves to ensure that residual gas does not seep through units whose pilot lights are out. During the system
restoration process, the main distribution system would be purged; then workers would have to insure at each
point of service that heating and cooking gas lines are safely purged and operational before restoring service
and relighting pilot lights. Any homes or buildings with safety issues would need remediation before any gas
restoration. Even losing service to 130,000 customers would be considered a major outage and could have
taken five to seven weeks (!!) to restore. A large outage could also cause extensive property damage due to
burst water pipes within homes and buildings, since water expands when it freezes.
[10] Researchers will complete work on an inhaled COVID vaccine that will sharply reduce transmission. The
COVID wave this winter is much milder than the prior three, particularly for those below 75; most of the rise in
hospitalizations is attributable to the over 75 cohort. There’s also evidence that the monovalent XBB.1.5 booster
works: the Netherlands reports ~70% XBB vaccine efficacy rates with respect to risk of hospitalization and ICU
admission even for older people. However, the XBB booster doesn’t do much to prevent transmission; at best
it might suppress infection risk by 30%-40% in the first month and then its efficacy vs infection declines.
What’s needed: an inhaled vaccine to produce mucosal immunity, block infection and reduce transmission.
Several inhaled and tracheally administered proteins are under development and have already elicited robust
immune and T cell responses against COVID in non-human primates. I suspect one will be approved in 2024.
US COVID hospitalizations by age
Weekly rate per 100,000
160
75+ years
65-74 years
50-64 years
40-49 years
140
120
100
80
60
40
20
0
Mar-2020
Mar-2021
Mar-2022
Mar-2023
Source: CDC, JPMAM, December 16, 2023
Happy New Year. Given the election, I think it’s going to be a long one.
Michael Cembalest
JP Morgan Asset Management
43
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
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EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
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EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • 2024 Outlook
January 1, 2024
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