GA
Medical
Freedom
Agency
purges
Deregulation
Tariffs
Deportations
Tax
cuts
Cost
cutting
Crypto
Oil & Gas
EYE ON THE MARKET | OUTLOOK 2025
The Alchemists
Deregulation, deportations, tariffs, tax cuts, cost cutting, crypto, oil & gas, medical freedom and
Agency purges: What could possibly go wrong?
Sections include the AI Golden Goose, the invisible nuclear renaissance, DOGE Quixote, the two
China traps, Dr. Seuss goes to Europe, a crypto update and the 2025 Top Ten list.
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 2025, I want to share with you our much-anticipated outlook from my investment
partner
of nearly
three
decades, aMichael
Cembalest.
year
marks the
twentieth anniversary
How
do you
summarize
year that
was in This
many
respects
indefinable?
On one of
hand,
the European
sovereign
debt
high
Michael’s
important
work, and
as always,
thiscrisis,
editioncontracting
is full of deephousing
thinking markets
and oftenand
controversial
unemployment
weighedwill
heavy
on all of our
the
same time,
record
perspectives.
“The Alchemists”
not disappoint,
as itminds.
is one ofBut
his at
best
ever—and
be sure
to pay
corporate profits and strong emerging markets growth left reason for optimism.
special attention to the cover art as it is a roadmap for everything that you will find throughout the
sevenSo
deep
divesthan
and the
ten list
forlike
2025toatlook
the end.
rather
looktop
back,
we’d
ahead. Because if there’s one thing that
we’ve learned from the past few years, it’s that while we can’t predict the future,
we can
certainly
help you
prepare
for it. we thank you for your continued trust and
On behalf
of all
of our partners
here
at J.P. Morgan,
confidence in all of us. We will continue to work tirelessly to earn it every day.
To help guide you in the coming year, our Chief Investment Officer Michael
Cembalest has spent the past several months working with our investment
leadership
acrosshealthy
Asset and
Management
Wishing
you a peaceful,
prosperousworldwide
new year. to build a comprehensive view
of the macroeconomic landscape. In doing so, we’ve uncovered some potentially
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
trust and confidence, and look forward to working with you in 2011.
Most sincerely,
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Contents
The Alchemists: deregulation, deportations, tariffs, tax cuts, cost cutting, oil & gas, crypto, medical freedom
and Agency purges. What could possibly go wrong?....................................................................................2
The Golden Goose: AI adoption, trends and milestones ............................................................................. 16
What nuclear renaissance? Wake me when we get there ........................................................................... 22
DOGE Quixote: the billionaires quest to reduce US government spending .................................................. 26
China: the liquidity trap and the Thucydides trap ....................................................................................... 32
Dr. Seuss Goes to Europe .......................................................................................................................... 35
The crypto Presidency: on the crypto rally and the sky-high return on political donations ........................... 37
Top Ten List for 2025 and a scorecard on 2024’s list ................................................................................... 40
1
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
Executive Summary
2025 OUTLOOK
The Alchemists: deregulation, deportations, tariffs, tax cuts, cost cutting, oil & gas, crypto, medical freedom
and Agency purges. What could possibly go wrong?
White House Alchemists aim to reverse some negative consequences of China’s entry into the World Trade
Organization, best illustrated by stagnant US industrial production and the other trends listed below…
The Silence of the Plants
Index (100 = 2000)
180
US consumer spending
US GDP
China joins
WTO
160
140
120
US industrial production
100
Other US data with sharp inflection
points around the year 2000:
• Rising manufacturing job losses
• Falling labor share of gross profits
• Rising suicide rates
• Rising non-metro poverty rates
See page 13 for details
80
60
40
20
0
1930 1940 1950 1960 1970 1980 1990
Source: BEA, Federal Reserve, JPMAM, 2024
2000
2010
2020
…by increasing tariffs while lowering income tax receipts, a Federal revenue mix reminiscent of the 1930’s…
Average weighted tariff rate on US imports
Sources of federal revenues since 1790
Percent share of federal receipts
30%
20% universal, 60% China, 200% Mexico
25%
100%
90%
80%
20% universal, 60% China
20%
70%
Corporate +
individual income
taxes
60%
10% universal, 60% China, 200% Mexico
15%
Tariffs
50%
10%
10% universal, 60% China
20% universal, 60% China, FTA exempt
40%
5%
10% universal, 60% China,
FTA exempt
20%
30%
10%
0%
1900
1920
1940
1960
Source: Yale Budget Lab, October 2024
1980
2000
2020
0%
1790
1840
1890
1940
1990
Source: Council of Economic Advisors, Tax Foundation, JPMAM, 2024
…and by strong-arming other countries to invest in the US instead of selling to it, a trend that’s already underway
US share of inward global Foreign Direct Investment (FDI)
Percent
26%
24%
China joins
WTO
Post-Covid focus
Trump era on resiliency
protectionism
22%
20%
18%
16%
14%
12%
10%
1995 1998 2001 2004 2007 2010 2013 2016 2019 2022
Source: UNCTAD, JPMAM, 2024
2
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
Executive Summary
2025 OUTLOOK
The US tariffs of the 1920’s and 1930’s were not inflationary in any broad sense…
When tariffs rose in the 1920's/1930's, prices and trade fell
Effective tariff rate
25%
CPI Price Index
Total trade, US$ billions
$14
21
17
20%
14
15%
$12
$10
$8
10
10%
7
3
5%
1910
1915
1920
1926
1931
Source: Alpine Macro, Peterson Institute, JPMAM, 2024
1937
$6
$4
$2
…but they were inflationary in 2018…
US importers/consumers absorbed cost of 2018 appliance
tariffs on China, Index (100 = December 2017)
122
Note: appliance tariffs increased from 10% to 25%
118
Appliance PCE inflation (US consumers)
114
110
Appliance PPI inflation (US importers)
106
102
Appliance
import price
from China
98
2018
2019
2020
Source: JP Morgan Global Economic Research, November 18, 2024
2021
…which is why some economists believe new tariffs would be inflationary this time around…
Tariff GDP & inflation estimates
Policy
Short run Long run Boost to
GDP % Chg GDP % Chg PCE infl
60% China Tariff w Retaliation
-1.4%
-0.2%
N/A R
10% Universal Tariff, No Retaliation
10% Universal Tariff, Retaliation
-1.2%
N/A
N/A R
-2.2%
-0.1%
N/A R
60% China & 10% Universal, No Retaliation
N/A
-0.8%
N/A T
60% China & 10% Universal, No Retaliation
N/A
-0.5%
1.0% Y
60% China & 10% Universal, Retaliation
N/A
-1.2%
N/A T
60% China & 10% Universal, Retaliation
-3.3%
-0.3%
N/A R
60% China & 10% Universal, Retaliation
N/A
-0.6%
0.9% Y
Sources: Piper Sandler, Robinson et al. (R), Yale Budget Lab (Y), Tax Foundation (T), 2024
3
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
… with the potential to reduce US manufacturing jobs as well, particularly in red states
Survey of economists on the effect of Trump tariffs on
manufacturing employment, 44 economists surveyed
100%
25%
Decrease
20%
5%
10%
0%
Source: WSJ, JPMAM, October 2024
0%
Source: Census Bureau, BEA, JPMAM, 2024
Mississippi
20%
Texas
10%
Georgia
59%
South Carolina
30%
New Jersey
40%
Indiana
15%
50%
Illinois
60%
Remain level
Won by Trump in 2024
Won by Harris in 2024
25%
Tennessee
70%
30%
Michigan
80%
16%
Increase
2023 goods imports as a share of 2023 state GDP, percent
Kentucky
90%
Import share of GDP: top 10 US states
The US has several options regarding tariffs, and so does China regarding retaliation
Possible tariff options under consideration
Current Possible
tariff
tariff Authority
Country
25.0%
85.0% Sec 301
China
Lists 1-2
China
List 3
25.0%
60.0% Sec 301
China
List 4a
7.5%
17.5% Sec 301
China
List 4b
0.0%
5.0% Sec 301
Mexico
Auto imports*
2.5% 100.0% Sec 232
EU
Auto imports
2.5%
25.0% Sec 232
Global
All imports
2.7%
12.7% IEEPA or Sec 122
China
All imports
13.7%
53.7% Legislation
Global
All imports
2.7%
??
Legislation
Source: GS, JPMAM. 2024 * = Chinese EVs assembled in Mexico.
Lists 1-2 are non-consumer goods; Lists 4a and 4b are mostly
consumer goods
Options for Chinese retaliation
• Tariffs on imports of US agriculture, chemical products
and aircraft parts
• Exchange rate depreciation and export tax rebates
• Export bans on rare earth elements; China just banned
exports of gallium, germanium and antimony to the US,
cutting off half of US supply
• Antitrust, national security and other penalties on US
companies operating in China (see below)
• Sales of US Treasuries and Agencies
• Diversify trade relationships as with RCEP (the largest
free trade area by market size) and its application to join
CPTPP, neither of which include the US
Trade deficits mask a lot of business that US companies do in China. While the US runs a large trade deficit
with China, after accounting for subsidiary sales in both countries, the bilateral trade balance is closer to flat.
In other words, Chinese companies export a lot TO the US while US companies sell a lot IN China
The US does a lot of business in China, but through its incountry subsidiaries rather than via exports, US$, billions
$0
-$50
-$100
-$150
US - China trade balance plus
in-country sales of subsidiaries
-$200
-$250
-$300
-$350
-$400
-$450
US - China trade
balance as reported
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23
Source: Deutsche Bank, Census, JPMAM, 2023
4
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
Biden immigration policies directly led to the largest unchecked, uncontrolled and unmanaged migrant surge on
record which will negatively impact major urban fiscal positions for many years 1. Even the Brookings Institute
recommended in February 2024 that the US border be temporarily closed to deal with the immigration backlog.
If in response, Alchemist border controls and deportations substantially reduce the labor supply…
Immigration and Customs Enforcement (ICE) removals by
presidency, Monthly removals
Inflow of undocumented immigrants to the US
Millions of people per quarter
1.2
1.0
0.8
45,000
Visa overstays
Undetected entries & detected/undetained
Released from ports of entry
Released between ports of entry
Obama
40,000
Bush
35,000
30,000
Removals refers to the
number of non-citizens
deported from the US
Trump
25,000
0.6
Biden
20,000
15,000
0.4
10,000
0.2
5,000
0.0
2018
2019
2020
2021
2022
Source: San Francisco Fed, November 2024
0
2023
2024
'02
'04
'06
'08
'10
'12
'14
'16
'18
'20
'22
'24
Source: TRAC, JPMAM, September 2024
…which could reverse the rollover in the lowest quartile of wage growth…
Atlanta Fed Wage Growth Tracker
Share of employees who are likely unauthorized
immigrants, Percent
Percent
8%
0%
Lowest quartile
7%
5%
10%
15%
20%
Landscaping
Households
6%
Building services
5%
Crop production
Animal slaughtering
4%
General food industry
3%
Highest quartile
2%
1%
1998 2001 2004 2007 2010 2013 2016
Source: Bloomberg, JPMAM, November 30, 2024
Bakeries
Dry cleaning
Construction
2019
2022
2025
Rug mills
Source: 2023 Census American Community Survey, Goldman Sachs
…would the combination of tighter labor markets and tariffs drive consumer price inflation higher again?
US consumer price inflation measures
Percent, 3 month annualized change
9%
8%
7%
Cleveland Fed median CPI
Atlanta Fed sticky CPI
Cleveland Fed trimmed mean CPI
6%
5%
4%
3%
2%
1%
0%
1985
1990
1995
2000
2005
2010
Source: Bloomberg, JPMAM, November 30, 2024
1
2015
2020
2025
“Migrants and asylum seekers pose budgetary challenges”, S&P Global Ratings, February 13, 2024
5
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
Or would the Alchemists be able to offset the inflationary shocks of tighter labor supply and tariffs with a positive
productivity shock from deregulation, which would be consistent with evidence that less regulation is correlated
with higher productivity and other favorable economic outcomes…
Regulation slows growth in the OECD, helps in non-OECD
Regulation and productivity
Effect of regulation on annual real GDP growth per capita
Total factor productivity growth, 2014-2025
2.0%
POL
0.5%
-1.0%
-1.5%
-2.0%
IRL
ISR
ITA ESP
0.0%
UAE
AUS
CHN
1.0%
-0.5%
5%
IND
1.5%
MEX
RUS
ARG
BEL
IDN
JPN
FRA NOR
3%
SWE
CAN
BRA
4%
USA
DEU
2%
UK
1%
SWI
0%
NTH
-1%
non-OECD
OECD
-2%
Less regulation
40
50
60
70
80
90
Index: burden of government regulation, ease of starting a
new business and freedom to compete
Source: Conference Board, World Bank, Fraser Institute, WEF, JPMAM, 2024
-3%
0
1
2
3
4
Regulation index (0 = lowest, 6 = highest)
Source: Heckelman (Wake Forest), 2019; JPMAM
5
6
…particularly when compared to the regulatory surge that took place under the Biden administration?
Regulatory activity by administration
Cumulative # of economically significant rules by
month 40 of each presidency
300
250
200
150
100
From Inauguration Day to April 19th of Year 4
$1,400
Biden
$1,200
Obama
300
Total costs of final rules (US$, billions)
Paperwork hours (millions)
250
$1,000
Trump
Clinton
200
$800
GW Bush
GHW Bush
$600
Reagan
$400
50
0
0
5
10
15
20
25
30
Source: GWU Regulatory Studies Center, May 2024
35
40
45
150
100
$200
50
$0
0
Obama
Trump
Biden
Source: Doug Holtz Eakin, American Action Forum, April 2024
From the Eye on the Market archives: US regulations tend to pass with little oversight or review. According to the George
Mason University Mercatus Center, for 80% of all new regulations passed from 2008-2012, there was either no regulatory impact
analysis (RIA) prepared by the sponsoring agency or the RIA only covered a minor part of the proposal. Second, of all Federal
rules finalized from 2003 to 2012, OIRA only reported cost-benefit information on a very small fraction of them.
Agency use of Regulatory Impact Analysis (RIA)
% of regulations from 2008 - 2012
Office of Information and Regulatory Affairs (OIRA) only
reports cost/benefits on a small fraction of regulations, #
60%
40,000
50%
35,000
30,000
40%
25,000
30%
20,000
20%
15,000
10,000
10%
0%
3,203
5,000
No evidence of any
RIA use provided
Agency explained
how RIA affected
a minor decision
Agency explained how
RIA affected at least
one major decision
Source: Mercatus Center at George Mason University, March 2015
0
115
Federal rules finalized
from 2003 to 2012
Economically
Rules reported on by
significant rules
OIRA with benefit and
reviewed by OIRA
cost information
Source: Mercatus Center at George Mason University, April 2013
6
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
And could expansion of bank capital from a probable end to Basel III discussions boost US credit growth,
assuming that Basel III-affected US banks had already begun to accumulate excess capital that new rules would
have required (~$200 billion, assuming 10% on $2 trillion in additional risk weighted assets)?
Projected increase in Category I and II US bank risk
weighted assets due to proposed Basel rules, US$, trillions
$10
Current rules
$9
Basel 3 Proposal
$8
$7
Credit Valuation
Adjustment
$6
Market Risk
$5
$4
Operational Risk
$3
$2
Credit Risk
$1
$0
Standardized Advanced
Basel 3
Approach
Approach
Proposal
Source: Morgan Stanley, Oliver Wyman, November 2023
Since oil & gas production levels are already high, and since the Bessent 3-3-3 production increase targets are
rather modest 2, would fossil fuel production rise enough to bring energy prices down…
Production of crude oil, natural gas and natural gas liquids
Trillions of BTUs per month
8,000
7,000
6,000
5,000
Bessent 3-3-3 target
Natural gas liquids
Natural gas
Crude oil
4,000
3,000
2,000
1,000
0
'00 '02 '04 '06 '08 '10 '12
Source: EIA, JPMAM, September 2024
'14
'16
'18
'20
'22
'24
On US oil & gas production
The Biden administration did not meaningfully curtail
US oil & gas production; even LNG export restrictions
didn’t have much of an impact given limited scope.
The Biden approach was more geared to subsidizing
renewables to the tune of $1-$3 trillion (the final price
tag is not clear yet). Maybe Arctic drilling picks up,
but I’m not sure how much scope there is for more US
oil & gas production to bring down US energy prices,
particularly if incremental gas production is exported,
and since gas is currently around $3.5 per mmbtu
…or are the inflationary consequences of the energy bill too entrenched at this point to reverse?
Residential electricity prices by state
Core goods PPI component inflation
35
80%
% increase vs 2018 for each of the 47 core goods categories
US$, cents per kWh
70%
30
60%
California
25
50%
40%
New York
20
Pennsylvania
15
Texas
10
2016 2017 2018 2019
Source: EIA, JPMAM, Q3 2024
Transformers &
Power Regulators
2020
2021
2022
2023
2024
30%
20%
10%
0%
-10%
Source: Bloomberg, JPMAM, November 30, 2024
Bessent’s proposed oil and gas increase of 3 mm barrels of oil equivalent per day is equal to 529 trillion BTUs
per month, a roughly 7% increase vs average monthly US production of oil, gas and NGLs in 2024
2
7
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
And if the Alchemists cannot find enough government expenditures to cut (see DOGE Quixote section beginning
on page 26) to offset the impact of any tax cuts they are able to pass, would they increase the budget deficit…
Trump: 10-year budget deficit effect of proposed policies
US$, trillions
Universal 10% tariff
Repeal clean energy sub
60% China tariff
Extend indiv tax cuts
Eliminate SS benefit taxes
Repeal SALT cap
Extend bus tax cuts
Lower corp inc tax
Net
-$4
-$3
-$2
-$1
$0
$1
Source: Wharton, Peterson Institute, PSC, CFRB, JPMAM, 2024
$2
What exactly will Congress allow?
This chart is not meant as a projection of Trump’s
impact on the deficit since Congress would be unlikely
to pass all the tax cuts shown without more revenue
offsets. When the TCJA passed in 2017, the SALT cap
was introduced for this very reason. But the chart is
useful in highlighting the probable direction of the
deficit under Trump. I expect most GOP fiscal hawks to
go into hibernation like they always do and wait for the
next Democratic administration before reappearing
…at a time when budget deficits are already very large despite almost full employment…
US budget balance vs unemployment rate
Surplus (deficit) % of GDP
5%
Percent
0%
Budget balance
0%
3%
-5%
6%
-10%
Unemployment
rate
9%
-15%
-20%
1969
1979
1989
1999
2009
Source: Bloomberg, JPMAM, November 30, 2024
12%
2019
15%
…within a decade of the crossover point when entitlements plus interest are projected to permanently exceed
Federal tax revenues?
Entitlement spending, mandatory outlays and net interest
payments vs revenues, % of GDP
26%
Entitlements + Other Mandatory
24%
Outlays + Net Interest
22%
20%
18%
Revenues
16%
14%
12%
10%
8%
6%
Net Interest
4%
2%
0%
1965
1975
1985
1995
2005
2015
2025
2035
Source: Congressional Budget Office, JPMAM, March 2024
8
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
And if very tight governing margins in the House do not materially constrain the Alchemist fiscal agenda…
Partisan House leadership by majority party
Percent margin
60%
Democratic control
Republican control
50%
40%
30%
20%
10%
0%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Source: VoteView Roll Call Votes database, New York Times, JPMAM, 2024
Razor-thin GOP margins in the House
The GOP begins the year with a 219-215 majority with one
vacant seat after the Gaetz resignation. Stefanik (R-NY)
and Waltz (R-FL) are expected to join the Trump
Administration, putting the GOP margin at 217-215 with
zero room for defections. A special election for the Gaetz
seat has been called for April 1 and the other two special
elections will probably occur in May. If the GOP wins all
three, it would put them back at a 220-215 margin, almost
the tightest margin on record going back to 1910
…how will the bond markets respond at a time when the 10 year Treasury has risen despite Fed easing…
10 year Treasury yield change after the first Fed cut
1.0%
Sep '24
Jul '95
Jun '89
Sep '07
0.8%
0.6%
Sep '98
Jan '01
Jul '19
0.4%
0.2%
0.0%
-0.2%
-0.4%
-0.6%
-0.8%
0
5
10 15 20 25 30 35 40 45 50 55 60 65 70 75
Business days since first Fed rate cut
Source: Bloomberg, JPMAM, December 26, 2024
…and will the Fed be able to ease further as markets are now pricing in?
Fed funds target rate: current vs prior market expectations
Percent
5.50%
5.25%
5.00%
December 27, 2023
4.75%
4.50%
4.25%
December 26, 2024
4.00%
3.75%
3.50%
Jan-24 Apr-24 Jul-24 Nov-24 Feb-25 May-25 Sep-25 Dec-25
Source: Bloomberg, JPMAM, December 26, 2024
9
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
And if long term interest rates rose over 5%, what would that do to equity P/E multiples since falling interest
rates account for the largest share of S&P margin increases over the last two decades?
Largest contributors of S&P 500 margin expansion from 2000 to 2019
Percent
Globalization of the supply chain:
wage savings
Wage savings from more
efficient domestic plants
Tax rate declines
Interest rate declines
Globalization of the supply chain:
lower capital intensity
0%
10%
20%
30%
Source: Census, BLS, Empirical Research, 2024
40%
50%
60%
70%
80%
90%
100%
Investors are inclined to give the Alchemists the benefit of the doubt that this will all work out, and very tight
supply conditions of US equity markets argue in their favor…
Share of US households expecting higher stock prices in
12 months, Percent of respondents
Net equity supply globally
60%
$1,400
55%
$1,200
50%
$1,000
45%
$800
40%
$600
US$, billions per year
35%
$400
30%
$200
25%
$0
20%
-$200
15%
2017
2022
1987
1992
1997
2002
2007
2012
Source: Conference Board, Bloomberg, JPMAM, November 30, 2024
-$400
Non-US SPAC
US SPAC
US
Non-US
'99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19
Source: J.P. Morgan Global Markets Strategy, November 2024
'21
'23
…but the Alchemists don’t have much room for error given the expensiveness of most US financial markets
Current market valuation percentile vs history; 100% = most expensive, 0% = least expensive
Leveraged loan B-rated spread to maturity
CMBS AA spreads
CMBS BBB spreads
1997
Leveraged loan spread to maturity
2007
1997
EM dollar bond spreads
2000
2007
European HY spreads 7-10 yr
US HY CCC-B spread difference
1999
European CoCo yields
US HY CCC spreads
1999
2014
Bloomberg US HG corp bond spreads
1999
US HY spreads
JPM US IG corp bond spreads
1998
1995
Mortgage spread to UST
2005
1989
MSCI China A shares forward P/E
MSCI India forward P/E
2007
MSCI EM Asia forward P/E
MSCI China forward P/E
MSCI Emerging Markets forward P/E
1998
1996
MSCI Emerging Markets P/B
1996
2005
Europe P/E discount vs US
MSCI Japan forward P/E
2005
MSCI Europe forward P/E
1999
1999
Russell 1000 value forward P/E
KBW regional banking forward P/E
Russell 1000 growth forward P/E
1995
2005
NASDAQ forward P/E
2001
Source: Bloomberg, JPMAM, December 27, 2024
1995
S&P 400 mid cap forward P/E
1995
1990
S&P 500 ex-tech and financials forward P/E
S&P 500 info tech forward P/E
2010
1991
S&P 600 small cap forward P/E
S&P 500 equal weighted forward P/E
1990
S&P 500 EV/EBITDA
S&P 500 price/FCF
2006
S&P 500 trailing P/E
0%
S&P 500 price/sales
10%
1991
20%
1990
30%
S&P 500 median forward P/E
40%
S&P 500 forward P/E
50%
1990
60%
1990
70%
1995
S&P 500 EV/sales
S&P 500 price/book
1991
80%
2014
90%
fixed income
non-US equities
1999
US equities
100%
Market variable with year of inception
10
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
The Alchemists appear to want to break things: I’m going to take them at their word
If the current soft landing endures, it would be one of few times in the last 60 years that the Fed raised rates to
stem inflation without triggering a recession. What the “recessionistas” missed: the unusually strong position
of the corporate sector heading into Fed tightening in 2022. That was different this time, as shown below.
Other good news: labor market conditions are easing but not cratering, and consumer spending and business
capital spending are growing at a pace consistent with ~2.5% GDP growth. Single family and multifamily housing
supply should continue to grow, dampening real estate inflation. On credit, spreads are tight and both high
yield and leveraged loan delinquency rates are low. M&A activity should benefit from $750 billion of private
equity dry powder and the departure of an FTC chair who according to the WSJ, “would not be missed, except
perhaps by corporate lawyers racking up billable hours defending against her antitrust revanchism” 3.
I also believe that deregulation can boost growth for reasons cited earlier. The deregulation trend began during
the Carter Administration when it was applied to trucking, airlines, natural gas and banking. During the Reagan
and Clinton Administrations, deregulation was extended to telecom and electricity markets. In a retrospective
of 1990’s US economic policy, Peter Orszag at Brookings concluded that despite bumps in the road, deregulation
had made the US economy more efficient in the long run 4. A light-touch regulatory approach combined with a
Venture Capital recovery which is already underway (see page 14) could keep animal spirits going. As shown in
the last chart, small business capital spending surveys surged after the election.
US corporate sector financial balance
The FTC vs M&A
4%
$600
M&A deal volume, US$, billions
% of corporate gross value added, 4-quarter average
2%
* Gross savings less capital transfers, capital
expenditures and foreign profits retained abroad
$500
Lina Khan
FTC regime
Completed deals
Withdrawn deals
Pending deals
$400
0%
$300
-2%
$200
-4%
$100
-6%
1960
Source: Federal Reserve, BEA, JPMAM, Q3 2024
$0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Source: Marquette Associates, June 2023
Deregulation and business capital spending
Small business capex plans, % of NFIB Survey respondents
1970
1980
1990
2000
2010
2020
Product market regulation index: 0=least regulated, 6=most regulated
6
5
4
3
2
1
0
Electricity
Nonresidential business
investment, % capital stock
FERC 888 on Wholesale
Competition Through Open
Access
Telecommunications
Act of 1996
Telecom
1987
1989
1991
1993
1995
Source: OECD ETCR database, BEA.
1997
1999
2001
planning any capex in next 3-6 months, seasonally adjusted
12.0
32%
11.5
30%
11.0
28%
10.5
26%
10.0
24%
9.5
9.0
8.5
22%
20%
18%
2021
2022
2023
Source: Bloomberg, JPMAM, November 30, 2024
2024
In a departing gesture, Lina Khan resurrected a dormant 1936 Act which hadn’t been litigated by the FTC for
over 30 years in order to sue a liquor distributor for price discrimination. I would like to commend the WSJ for
resurrecting a word like “revanchism” which dates back to the Franco-Prussian War
4
“Retrospective on American Economic Policy in the 1990s”, Jeffrey Frankel and Peter Orszag, Nov 2, 2001
3
11
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
That said, policies and statements from Trump nominees (both cabinet-level and those not requiring Senate
confirmation) indicate that the Alchemists aim to “break” something, whether it’s globalization, the Federal
bureaucracy, the IRS, the FBI, Medicare, US vaccine policy (see page 15), lax US border policies, its “Deep
State” opponents or something else. Whatever the goals, I take the Alchemists at their word: they are going
to break something, I just don’t know what.
For investors, there’s little room for error with valuations this high and since valuations are now driving markets
just as much as earnings growth. Also: the S&P 500 just registered two 20%+ years in a row, something which
occurred just ten times since 1871. Only during the 1990’s bull market and the Roaring Twenties did the good
times continue for another two years. I expect a 10%-15% correction at some point in 2025 as the Alchemists
apply their elixirs to the US economy 5. Plan accordingly: US equity markets should end the year higher than
they began but be sure to have plenty of liquidity to take advantage of what might be a volatile year.
Ultimately, the 10-year Treasury will be the best barometer of the new administration. If the supply side
benefits from deregulation and tax cuts overpower the inflationary impacts of tariffs, a shrinking labor supply
and large budget deficits, the 10-year Treasury should remain in the range of 4.5% to 5.0%. But if the 10-year
rises meaningfully above 5.0% and stays there, something will have gone very wrong.
This Outlook marks 20 years of the Eye on the Market, which I launched in early 2005 as a text-only monthly
email designed for clients using a Blackberry or Palm Pilot. It has been a privilege to work on this effort for that
long, and I have learned quite a lot through the process. I would like to thank Jamie and Mary for their steadfast
support, even when I write about controversial topics…and this year is no exception. Happy New Year.
Michael Cembalest
JP Morgan Asset Management
Global index return decomposition, 2024
YTD return contribution, local currency
30%
Dividends
Earnings growth
P/E multiple change
US
25%
World
20%
China
Japan
15%
Asia
10%
Europe
EM
5%
0%
S&P 500
MSCI
World
MSCI
China
TOPIX
MSCI
Asia exJapan
Source: Bloomberg, JPMAM, December 28, 2024
STOXX MSCI EM
600
S&P 500: Two consecutive years of 20%+
total returns and what followed
1879
48%
1924
25%
1927
35%
1935
46%
1950
28%
1954
47%
1975
38%
1985
31%
1995
38%
2023
26%
1880
24%
1925
29%
1928
37%
1936
36%
1951
26%
1955
34%
1976
23%
1986
24%
1996
23%
2024
27%
1881
8%
1926
14%
1929
-3%
1937
-31%
1952
17%
1956
6%
1977
-6%
1987
0%
1997
33%
2025
??
Source: Shiller, BBG, JPMAM, December 30, 2024
1882
2%
1927
35%
1930
-23%
1938
20%
1953
1%
1957
-9%
1978
8%
1988
19%
1998
29%
2026
??
Intra-year stock market corrections: in 60% of the last 100 years there’s been at least a 10% correction, and in
40% of all years at least a 15% correction
5
12
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
Executive Summary Figures 1a-1d: China joining the WTO coincides with highly negative US inflection points
US manufacturing job losses
US labor's share of corporate profits
10%
66%
10-year percent change
Percent of non-financial gross profits
5%
0%
64%
-5%
-10%
62%
-15%
-20%
60%
-25%
-30%
-35%
China joins
WTO
58%
China joins
WTO
-40%
-45%
'60 '65 '70 '75 '80 '85 '90
Source: BLS, JPMAM, November 2024
'95
'00
'05
'10
'15
'20
US suicide rate
Rate per 100,000, age adjusted, year 2000 standard
16
15
China
joins WTO
'25
56%
'60 '65 '70 '75 '80 '85 '90
Source: BEA, JPMAM, November 2024
'95
'00
'05
'10
'15
'20
'25
2010
2015
US non-metro poverty rates
Percent
19%
18%
China
joins WTO
14
17%
13
16%
12
15%
11
14%
10
1960
1970
1980
1990
2000
2010
2020
Source: National Center for Health Statistics, CDC, Kevin Drum, 2023
13%
1970 1975 1980 1985 1990 1995 2000
Source: Census Current Population Survey, 2024
2005
13
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Executive Summary
Executive Summary Figures 2a-2f: Second derivative improvements in Venture Capital
After the Metaverse/SPAC/hydrogen debacles of 2021-2022, Venture Capital dynamics weakened. In 2024,
conditions stabilized with second derivative improvements in cash raised, the number of down rounds, changes
in pre-money valuations from seed rounds to Series D, and a dealmaking index which incorporates dividend
catch-up policies, liquidation preferences, anti-dilution terms, voting rights and valuation step-ups.
VC deal volume and cash raised
Down rounds as a share of VC funding rounds by quarter
Thousands
US$, billions Percent
2.5
Total cash raised
Total rounds
2.0
$80
$60
25%
20%
15%
1.5
$40
1.0
0.5
0.0
2018
2019
2020
Source: Carta, Q2 2024
2021
2022
2023
2024
10%
$20
5%
$0
0%
2019
2020
2021
VC median pre-money valuations by funding round
VC step-up multiples
20%
6x
Percent change from Q1 2022
Series A
-60%
-80%
Jan-22
4x
Series B
Series C
-40%
Seed to series A
Series A to B
Series B to C
5x
-20%
3x
2x
Series D
Source: Carta, JPMAM, Q2 2024
1x
2019
2020
2021
Source: Carta, JPMAM, Q2 2024
VC demand vs supply index by stage
Late-stage VC dealmaking index
Jul-22
Jan-23
Jul-23
Jan-24
Jul-24
3.0x
100
Later-Stage Index
2.5x
2024
Current round's valuation divided by previous round's valuation
Seed
0%
2023
2022
Source: Carta, Q2 2024
90
Venture-Growth-Stage Index
2022
2023
2024
More investor friendly
80
Early-Stage Index
70
60
2.0x
50
40
1.5x
30
20
1.0x
10
0.5x
2010
2012
2014
2016
Source: Pitchbook, JPMAM, 2024
2018
2020
2022
2024
More startup friendly
0
2010
2012
2014
2016
2018
2020
Source: Pitchbook, JPMAM, 2024
2022
2024
14
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
Executive Summary
2025 OUTLOOK
Executive Summary Figures 3a-3d: The Medical Freedom movement
Aaron Siri, RFK’s personal lawyer during his Presidential campaign, has petitioned the FDA to revoke approval
of the US polio vaccine. Siri filed the petition on behalf of a nonprofit that’s also challenging diphtheria, tetanus
and Hepatitis A vaccines. RFK on Mr. Siri: “There’s nobody who’s been a greater asset to the medical freedom
movement than him” 6. While RFK now reportedly supports the polio vaccine in statements made to US Senators
as he attempts to be confirmed7, he has also stated that contaminated polio vaccines might have killed more
people than they saved 8. RFK says a lot of different things, depending on the audience.
One consequence of the Medical Freedom movement: declining vaccination rates for measles, mumps and
rubella and a rising number of states with exemptions 9. In 2023-2024, two thirds of US states fell below the
HHS target vaccination rate of 95%.
I’m not surprised that Pharma, Biotech and Life Sciences is one of the worst performing industry groups in the
S&P 500 since markets began pricing in a Trump victory last fall (10/1/2024).
US Mumps, Measles and Rubella vaccination rates
A history of polio in the US
7 Number of states with specified vaccination rates
50
35
30
25
20
Case rate per 100,000
people
Death rate per 100,000
people
6 45
5
40
35
10
2 15
5
1
2010
0
Ten worst performing S&P 500 Industry Groups since
October 1, 2024, Total return, percent
90%-94.9%
25
3
>= 95%
>= 95%
4 30
15
0
1910
1930
1950
1970
1990
Source: US Public Health Reports, US Census, OWID, 2019
HHS target: 95%
20
90%-94.9%
10
5
0
<90%
<90%
2019-2020 school year
2023-2024 school year
Source: KFF, 2024. In 2019-2020, AK and DE did not report
RFK Jr: A Fibliography
"Paul Offit, Children’s Hospital in Philadelphia: Conversation
with RFK Jr"
MATERIALS
PHARMA, BIOTECH & LIFE SCIENCES
REAL ESTATE
“How RFK Jr distorted vaccine science” [Scientific American]
FOOD, BEVERAGE & TOBACCO
"How RFK Jr Falsely Denied His Connection to a Deadly
Measles Outbreak in Samoa [Mother Jones]"
HEALTH CARE EQUIPMENT & SERVICES
CONSUMER DURABLES & APPAREL
"RFK Jr spent years stoking fear and mistrust of vaccines.
These people were hurt by his work [AP News]”
UTILITIES
ENERGY
"The Anti-Vaccine Propaganda of RFK Jr [McGill University]"
HOUSEHOLD & PERSONAL PRODUCTS
“RFK’s error-ridden piece on vaccine-autism links [Nation]”
TRANSPORTATION
-12%
-9%
-6%
Source: Bloomberg, JPMAM, December 27, 2024
-3%
0%
New York Times, December 15, 2024
“Trump's pick for health secretary, RFK Jr, supports polio vaccination, US senator says”, Reuters, Dec 16, 2024
8
See “RFK Jr’s vaccine half-truths tell a great, dangerous lie”, Washington Post, December 19, 2024 and “RFK Jr
Incorrectly Denies Past Remarks on Vaccine Safety and Effectiveness”, August 24, 2024
9
“Childhood Vaccination Rates Continue to Decline as Trump Heads for a Second Term”, KFF, November 18, 2024
6
7
15
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
AI adoption
2025 OUTLOOK
The Golden Goose: AI adoption, trends and milestones
It would be difficult to overstate the importance of the Mag 7 stocks to US equity market returns:
• Mag 7 stocks and the tech sector more broadly account for most of the recent outperformance of the US vs
Europe and Japan. Mag 7: 14% of S&P sales, 31% of sales growth, 33% of earnings growth
• The ten largest US stocks have higher profitability than market leaders of prior decades going back to 1950
• Mag 7 profit margins, earnings growth and returns dwarf the rest of the US equity market. Note how S&P
500 ex-Mag 7 earnings growth has been flat for the last year
• The share of S&P 500 stocks outperforming the index is close to its post-1990 low at ~30%
• Market concentration has blown through the year 2000 peak
Regions as a share of MSCI World market capitalization
Percent of total MSCI World market capitalization
70%
Free cash flow margins by decade for the ten largest
stocks, 1952-2024, Percent
30%
US
60%
25%
50%
20%
40%
15%
30%
Europe
20%
Japan
10%
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
AAPL
MSFT
GOOG
AMZN
NVDA
META
TSLA
BRK.A
LLY
V
10%
5%
0%
-5%
Source: Bloomberg, JPMAM, November 29, 2024
1950s 1960s 1970s 1980s 1990s
Source: Empirical Research, September 2024
S&P 500 tech net profit margins vs rest of market
S&P 500 and Mag 7 cumulative total return
25%
180
2010s
Tech
S&P 500 ex-tech
160
140
120
15%
Mag 7
S&P 500
S&P 500 ex-Mag 7
100
10%
80
60
5%
40
0%
20
-5%
1990
1995
2000
2005
2010
2015
Source: Empirical Research, JPMAM, November 2024
2020
2025
0
Jan-23
Jul-23
Jan-24
Jul-24
Jan-25
Source: Bloomberg, JPMAM, December 27, 2024
Earnings per share growth
Market cap of largest 7 companies in S&P 500
250%
35%
Percent of total index market cap
Rolling 2 year growth
200%
2020s
Cumulative total return, Jan 2023 = 0
Percent
20%
2000s
Mag 7
30%
S&P 500 ex Mag 7
150%
25%
100%
20%
50%
15%
0%
-50%
2017
2018
2019
2020
2021
2022
Source: Bloomberg, JPMAM, September 30, 2024
2023
2024
10%
1996
2000
2004
2008
2012
Source: FactSet, JPMAM, November 30, 2024
2016
2020
2024
16
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
AI adoption
That’s why it’s so important to understand how AI adoption pans out. As shown below, by 2026 NVIDIA’s
share of all US capital spending will be close to the two 20th century peaks. Just as notable: the hyperscalers
(Google, Meta, Amazon, Microsoft etc) would need $400-$500 billion in new revenues to earn their traditional
50% gross margin on ~$250 billion of annual data center spending.
AI capital spending in context
The hyperscaler revenue gap: $400 billion
18%
$500
US$ billions
Share of market-wide capital spending
16%
14%
NVIDIA data center revenues
IBM peak revenues (1969)
50% hyperscaler
gross margin
$400
Cisco, Lucent, Nortel peak revenues (2000)
12%
$300
10%
8%
GPUs = 50% of data
center operating cost
$400bn revenue
shortfall: Google,
Microsoft, Meta,
Apple, Oracle,
Bytedance,
Alibaba, Tencent,
X, Tesla, Other
$200
6%
$100
4%
2%
0%
$0
2020
2021
2022
2023
2024E 2025E 2026E
Source: Empirical Research, August 2024
1969
2000
NVIDIA Y25
Implied data
Required AI
revenue
center spending
revenue
Source: Sequoia, Bloomberg, JPMAM, October 2024
Projected AI
revenue
How much AI infrastructure is being built? Two rough estimates in “GPT” terms
• The inference of 12,000 Chat GPTs could be powered by current hyperscaler capex investment
• The training of 1,000 computationally intensive GPT-5s could be powered by NVIDIA’s est. 2026 GPU sales
The impact on data center growth
• The colocation data center market has doubled in just 4 years with vacancy at just 3% due to soaring demand.
Occupancy has increased by 30% since 2020, construction has jumped 7x in 2 years, project preleasing rates
are at 84% and data center asking rents have increased by 13%-37%
AI’s adherents believe that all of this investment will create a radically different world:
Due to AGI, most diseases could be cured over the next decade or two 10
Demis Hassabis, Google Deep Mind
Superintelligence could make fixing the climate and establishing a space colony a reality
Sam Altman, OpenAI
AI will end disease and poverty and bring about a renaissance of liberal democracy and human rights; many will
be moved to tears as they behold these accomplishments; AI is a thing of transcendent beauty
Dario Amodei, Anthropic, a company in which Amazon has invested $8 billion
80% of jobs will be automated with AI in three to five years
Richard Socher, Salesforce and You.com
By 2030, over 100,000 humanoid robots will be deployed in the real world
Rob Toews, Radical Ventures
Hundreds of millions of AGIs could automate AI research, compressing a decade of algorithmic progress (5+
orders of magnitude) into 1 year. We would rapidly go from human-level to vastly superhuman AI systems
Leopold Aschenbrenner in “Situational Awareness”
Some of the most remarkable machine learning/AI achievements are taking place in biomedicine. One
example is EVO, a large language model that has been trained on the genomes of 2.7 million microbes rather
than on words. The goal: decode and design DNA, RNA and protein sequences from the molecular to genomic
scale with high degrees of accuracy. The ARC Research Institute where it was developed describes EVO as the
Rosetta Stone of biology given its potential for diagnostic and therapeutic treatment of disease
10
17
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
AI adoption
Let’s return to earth for a moment. While the hyperscalers are immensely profitable, their capital spending
and R&D outlays as a share of revenues have been creeping up over the last year, something that our large cap
US growth managers are paying close attention to. Note how AI models with greater parameter intensity cost
a lot more to train.
The stakes are high. As a sign of what can go wrong after an era of excessive investment even when resulting
infrastructure is eventually utilized in full, consider Corning and its fiber optic business. Corning earned ~$4
billion in the year 2000 in this segment, but after the dot-com collapse Corning didn’t surpass that revenue level
again until 2018 in nominal terms, and revenues are still below year 2000 levels in real terms. Similarly, the
number of undersea fiber optic cables deployed globally each year did not surpass year 2000 levels until 2020.
So: while NVIDIA had yet another blowout quarter of earnings in Q3 (up 94% vs the same quarter in 2023, gross
margins of 73%), I’m more focused on what happens to the hyperscalers responsible for NVIDIA’s growth.
Estimated training cost and compute of select AI models
Hyperscaler capex and R&D as a share of revenues
Percent
70%
65%
Meta
Microsoft
Alphabet
Amazon
60%
55%
50%
Training cost (US$, thousands, log scale)
$1,000,000.
Metaverse money
incineration
$10,000.
$100.
40%
$10.
35%
30%
$1.
25%
15%
2017
2018
2019
2020
2021
2022
Source: Bloomberg, JPMAM, September 28, 2024
2023
2024
2025
Corning optical communications revenue
Google
PaLM
Meta
Llama 2
Google
LaMDA
Google
Google BERT-Large
Transformer
$0.1
0.001
20%
OpenAI
GPT-4
OpenAI
GPT-3
UW/Meta
RoBERTa Large (davinci)
$1,000.
45%
0.1
10.
1,000.
100,000.
Training compute (petaFLOPS, millions, log scale)
Source: Stanford Human-Centered Artificial Intelligence, Epoch, 2024
New undersea cables deployed per year
US$, billions
Number of cables
$5
30
Nominal
25
$4
20
15
$3
10
Real
(2000 US$)
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2024
2009
2021
2008
2018
2007
2015
2006
2012
2005
2009
2004
2006
2003
2003
Source: Bloomberg, company filings, JPMAM, 2024
2002
0
2001
5
2000
$2
$1
2000
Microsoft/NVIDIA
Megatron-Turing NLG
$100,000.
Google
Gemini Ultra
Source: TeleGeography, September 2021
18
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
AI adoption
AI adoption trends. There’s a lot of positive news from surveys of adoption levels and return on AI investment,
but surveys are not a proxy for the actual amount of money companies will be willing to pay for inference-based
models in their daily operations. The most striking figures: practically every surveyed CIO plans to adopt AI
applications in the near future; more than 80% of existing AI applications have met or exceeded expectations;
larger companies reported the highest success rates; and AI adoption appears to be at or above internet and
computer adoption rate curves. So: AI adoption is on track; I just think investors will be increasingly sensitive
to whether hyperscalers are earning a positive ROI on their capex outlays.
Surveys on the Return on Investment from Generative AI applications
Publisher
Date
Geography
Respondents
Conclusion
~50% of companies report ROI meeting expectations. ~40%
exceeding expectations
Morgan Stanley
June 2024
Global
~400, $500mm$20bn revenue
Ernst & Young
May 2024
US
~500 decision
makers
Senior leaders see positive ROI in: operational efficiencies
(77%), employee productivity (74%) and customer satisfaction
(72%)
Enterprise
Technology
Research
October 2024
Global
~1,800 (varied by
question)
97% of leading GenAI adopters report achieving tangible benefits
from deployments
Google Cloud
April 2024
Global
~2,500, 100+
employees,
$10mm+ revenue
74% are seeing positive ROI from GenAI investments. 84%
successfully transformed a GenAI use case idea into production
within a six month timeframe
Source: Morgan Stanley Research, Ernst & Young, ETR, Google, JPMAM, 2024
Estimated production timeline of GenAI applications
GenAI projects: return on investment vs expectations
50%
100%
Percent of survey respondents, 100 US and EU CIOs
1Q24 survey
2Q24 survey
3Q24 survey
40%
30%
% of survey respondents
Missed expectations
80%
Met expectations
60%
20%
40%
10%
0%
20%
In production/will Expect to be in
be in production production in
by end of 2024
2025
Expect to be in
No plans to
production after utilize AI/LLMs in
2025
near future
Exceeded expectations
0%
Tech
Consumer Healthcare Financials
Mfg
Source: AlphaWise, Morgan Stanley Research, 2024
Source: AlphaWise, Morgan Stanley Research, 2024
Companies reporting that return on investment of GenAI
projects exceeded expectations, % of survey respondents
AI adoption relative to other major technologies
60%
Adoption rate
100%
90%
50%
80%
70%
40%
60%
30%
50%
40%
20%
Internet (ITU: 1995-2021)
Internet (CPS: 2001-2009)
Computers (1984-2003)
AI (2024)
30%
20%
10%
0%
Industrials
10%
$751mm-1bn
$1-5bn
$5-10bn
$10-15bn
Respondent revenue
Source: AlphaWise, Morgan Stanley Research, 2024
$15-20bn
0%
0
5
10
15
20
Years since first mass-market product
Source: Bick et al (NBER), 2024
25
19
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
AI adoption
Other AI issues: energy. On data center energy demand, markets are way ahead of themselves regarding
potential for nuclear power to represent a greater share of data center energy consumption by 2030 or beyond,
whether grid-based or behind the meter (see next section). The hyperscalers will probably have to hyperscale
back their commitments for green power consumption and rely heavily on natural gas, as they have been. The
pie chart shows power consumption of US data centers based on their respective locations, their MW of
maximum power consumption and the grid mix in that state.
US data center power demand was actually flat from 2015 to 2019 despite a tripling in workload. The primary
reason: efficiency gains as data center workloads shifted from traditional centers to more efficient cloud and
hyperscale centers. This transition has mostly run its course now that the cloud/hyperscale share of compute
instances has reached ~95%, leading to slower improvements in data center power intensity (bar chart) and
projections of rising US power demand to 2030 and beyond (line chart).
US data center power consumption by energy source
7%
Data center power intensity
kWh per compute instance
1,400
6%
Natural gas
9%
43%
Coal
1,000
Nuclear
800
Wind
600
Solar
19%
1,200
400
Hydro
200
0
17%
2015 2016 2017 2018 2019 2020
Source: GS Global Investment Research, 2024
Source: EIA, Aterio, JPMAM, 2024
2021
2022 2023E
Are language models getting better? There’s a lot of debate about this, but I care a lot more about the adoption
and satisfaction rates on the prior page than model scoring since the former is more indicative of whether
today’s models meet the needs of companies who actually pay for them. If you’re interested in model scoring,
there are several benchmarks (Multitask Language Understanding MMLU or the Google-Proof Q&A benchmark),
and the usual suspects hopscotch each other with higher scores over time. The challenge: better performance
generally comes at a cost in terms of compute time. Note on the left how much better OpenAI is getting at
solving pattern extrapolation problems, but at a higher cost per task 11.
OpenAI advanced pattern extrapolation scores
US data center electricity use with projections
100%
600
ARC-AGI-1 evaluation set accuracy score
60%
500
o1 med
$0
$1
300
o1 high
o1 low
o1 preview
o1-mini
20%
6.7%-12.0%
400
Best community model
40%
0%
STEM graduate
o3 high
(tuned)
o3 low
(tuned)
Random
human
80%
TWh
o1 & o3 are OpenAI LLMs
customized to generate
longer answers to solve
harder problems
$10
$100
$1,000
Cost per task, US$ (log scale)
Source: ARC Prize competition, December 20, 2024
$10,000
200
4.4%
1.9% of US electricity generation
100
0
2014
Historical
2016
2018
Future range
2020
2022
2024
2026
2028
Source: LBNL 2024 US Data Center Energy Usage Report
“OpenAI o3 Breakthrough High Score on ARC-AGI-Pub”, Francois Chollet (Google), Dec 20, 2024. I prefer ARC
to MMLU or GPQA since ARC is not multiple choice and requires solving of higher order abstract problems
11
20
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
AI adoption
Other AI issues: semiconductor supply chains. Last fall, China deployed a record 125 aircraft in drills simulating
a blockade of key Taiwan ports, along with Liaoning aircraft carrier and ships 12. How sensitive is Taiwan to a
naval blockade? Very. As shown on the left, Taiwan’s reliance on energy imports is practically the highest in
the world, ranking alongside islands like Singapore, Hong Kong and Cyprus, microstates like Luxembourg and
energy-poor nations like Belarus. Which brings me to this: why did Taiwan shift away from nuclear power, its
only source of energy independence? By doing so, Taiwan has effectively increased its sensitivity to a Chinese
naval blockade. Reducing nuclear’s share of electricity generation from 50% in the 1980’s to 5% today is one of
the most baffling geopolitical decisions I have ever seen.
Net imports of fossil fuels as a share of primary energy
consumption
Taiwan nuclear share of electricity generation
50%
100%
45%
90%
40%
35%
70%
30%
Turkey
Netherlands
Greece
Italy
0%
Source: EI Statistical Review of World Energy, JPMAM, 2024
Belgium
Sri Lanka
15%
Ireland
South Korea
20%
Lithuania
North Macedonia
Estonia
Japan
Philippines
Luxembourg
10%
Cyprus
20%
Belarus
30%
Singapore
40%
25%
Taiwan
50%
Morocco
60%
China Hong Kong SAR
80%
10%
5%
0%
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: EI Statistical Review of World Energy, Taiwan Power, JPMAM, 2024
NVIDIA and TSMC
• According to TechInsights, NVIDIA controls 95% of the market for GPUs that accelerate AI tasks while TSMC
has a 92% share in advanced AI chip production according to BCG, including NVIDIA’s chip designs that TSMC
produces in its foundries. An argument can be made that TSMC-NVIDIA is the most important symbiotic
relationship in the tech sector when looking at current valuations
• NVIDIA is TSMC’s second largest customer after Apple at 10% of TSMC revenues
• NVIDIA is reportedly pushing TSMC to deliver new chip architecture every year instead of every two years
• While redesign issues related to overheating has delayed NVIDIA’s Blackwell chip rollout to 2025, the product
is apparently sold out for the next 12 months with NVIDIA’s CEO describing demand as “insane”. Blackwell
GPUs will have more than 2x the memory of NVIDIA’s current Hopper GPU, > 10x the interconnection speed
measured in terabytes per second and 25x greater energy efficiency
Global foundry revenue share distribution, 2024
Percent of $131.7bn total foundry revenue
Nexchip, 1%
Tower, 1%
IFS, 1%
Others, 3%
Korea, 11%
GF,
6%
HHGroup, 2%
SMIC, 5%
China, 8%
Others, 11%
DBHiTek, 1%
Samsung,
10%
VIS, 1%
PSMC, 1%
Taiwan, 70%
TSMC, 62%
UMC,
6%
Source: TrendForce, 2024
See NYT (“With Jets and Ships, China is Honing its Ability to Choke Taiwan”, 10/16/2024) and WSJ (“China Test
Drives a Taiwan Blockade”, 10/16/2024)
12
21
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Nuclear renaissance
What nuclear renaissance? Wake me when we get there
Investors have gotten excited about prospects for additional nuclear power in the US, driving shares of nuclear
pure play and nuclear-exposed shares higher. There are several factors driving this enthusiasm: new US
government regulations designed to speed up nuclear power development; the restart of decommissioned
nuclear plants; the gaggle of companies competing to deliver next-gen nuclear plants and small modular reactors;
and the Gates Terrapower project. Let’s take a look with more to follow in our annual energy paper in March.
Nuclear pure play and exposed stock returns
Total return index (100 = June 2021)
400
350
Nuclear exposed
Nuclear pure play
300
250
Nuclear exposed: Constellation Energy, Silex Systems,
Vistra, GE Vernova, Rolls-Royce, Honeywell, Lockheed
Martin, Fluor, Mitsubishi, Duke Energy, Dominion
Energy, Quanta Services, Fortum Oyj
200
150
100
2021
2022
2023
Source: Bloomberg, JPMAM, December 26, 2024
Nuclear pure play: Cameco, Oklo, Centrus Energy,
NuScale, BWX
2024
Traditional nuclear plant development
While the developed world dominated nuclear additions from 1950 to 1980, a combination of factors led OECD
nuclear additions to collapse. Since the 1990’s, almost all nuclear additions take place in the developing world.
During the 1980's, nuclear development shifted from
developed to developing countries
Developed market share of global MW of nuclear starts, 5yr avg.
40
35
30
25
Source: Power Reactor System Database, JPMAM, September 2024
Argentina
5
Slovakia
2020
Iran
2010
France
2000
Korea
1990
UK
1980
Year of construction start
Russia
1970
Egypt
1960
India
10
Turkey
15
Bangladesh
20
China
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1950
Nuclear plants under development with estimated grid
connection dates between 2024-2030, GW of capacity
0
Source: World Nuclear Association, JPMAM, 2024
As shown at the top of the next page, the cost per MW of developing economy nuclear plants is a fraction of
the four most recent OECD plant completions. Developing economy plants are also generally completed in 68 years; the few completions in the OECD in this century have taken a lot longer than that. There are efforts
underway to address this: in June 2024, Congress passed the Advance Act (Accelerating Deployment of Versatile,
Advanced Nuclear for Clean Energy) on a bipartisan basis. The act streamlines permitting for advanced reactors,
reduces regulatory fees for companies licensing advanced reactor technologies and updates outdated rules that
limit international investment. It also requires the Nuclear Regulatory Commission to develop a pathway to
license nuclear facilities at the sites of shuttered coal plants that already have a connection to the grid.
22
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Nuclear renaissance
Will new US regulations make a difference? Too soon to tell. The industry has a lot to prove to investors and
regulators: as shown in the third chart, nuclear projects are associated with the largest cost overruns of all
megaprojects. Vogtle 3, completed in Georgia in 2023 after extensive delays and cost overruns, was offline for
9.5 out of its first 48 weeks in 2024 according to the NRC due to feedwater pump blockages or failed heat
exchangers. Note that the US is also reliant on imported uranium, needs more enrichment capacity and has
practically no domestic supply of high assay low enriched uranium, which is the kind needed for the Gates
Terrapower project (its reactor in Wyoming has been delayed to 2030 at the earliest for this reason).
Capital cost of nuclear plants in developed countries vs
emerging markets, US$ millions / MW
$20
China, Fangchenggang 3
China, Fangchenggang 4
Pakistan, Kanupp 3
China, Tianwan 6
$5
Finland, Olkiluoto 3
$10
France, Flamanville 3
UK, Hinkley Point C
$15
USA, Georgia Vogtle 3 & 4
Select plants from developed countries
4 most recently completed EM plants
Average nuclear plant completion time by year and region
Years
20
18
16
14
12
10
8
6
4
2
0
1950
Developed country
Emerging country
1960
1970
1980
1990
2000
2010
Year of construction start
$0
Source: JPMAM, 2024
Source: Power Reactor System Database, JPMAM, September 2024
Average megaproject cost overruns
US production vs imports of uranium oxide
250%
70
Percent
Million pounds
60
200%
Imports
Domestic production
150%
100%
50%
Solar power (1%)
Energy transmission
Wind power
Pipelines
Roads
Fossil thermal power
Water
Bridges
Mining
Hospitals/health
Ports
Oil & gas
Tunnels
Airports
Rail
Bus rapid transit
Defense
Aeropsace
Buildings
Nonhydroelectric dams
Information technology
Hydroelectric dams
Nuclear power
Olympic games
Nuclear storage
50
0%
Source: Flyvbjerg database, 2024
40
30
20
10
0
1949
1959
1969
Source: EIA, JPMAM, 2024
1979
1989
1999
2009
2019
23
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Nuclear renaissance
Nuclear plant reopenings
In the US, Holtec plans to reopen the 53-year old Palisades plant in Michigan that was closed two years ago.
Palisades would be the first plant to begin decommissioning, stop the process and then restart. In addition,
Microsoft and Constellation Energy announced a plan to reopen 50-year old Three Mile Island reactor #1 in 2028
for power @~$100 per MWh, and NextEra is considering a restart of the 45-year old Duane Arnold plant in Iowa
that was shut in 2020 after a fire. While it’s possible to reopen older plants, most would probably not receive
an operating license as a new facility given evolving safety standards. Skeptics of the reopening approach
include Palisades’ own director of engineering from 2006 to 2013 who cites Holtec’s inexperience with nuclear
plant operations 13. While these projects have attracted a lot of attention from power market customers, the
cost and timing of their reopening is far from certain.
The big picture: once a plant’s decommissioning begins, it would probably be too expensive to restart it; as a
result, restart attempts will most likely be confined to the three plants cited above and at most a handful of
reactors whose decommissioning has barely begun (San Onofre in California) or uncompleted plants whose
construction was halted midstream (VC Summer in South Carolina).
Next-gen nuclear designs
• Most next-gen nuclear designs are based on sodium-cooled fast reactors, high-temperature gas-cooled
reactors (HTGR) or molten salt. Adherents typically claim that their designs can lower costs, be built quickly,
reduce accumulation of nuclear waste, use uranium more efficiently via waste recycling, improve safety
(passive shutdown and cooling) and reduce risk of nuclear proliferation
• But: approaches like molten salt and HTGR were attempted in the past and abandoned due to poor
performance. Water-moderated/cooled reactors have proven superior in terms of reliability, operational
ease, maintenance and economics: they have logged over 17,000 plant-years in operation with capacity
factors of 80%-90% vs ~500 years for sodium cooled plants, 40 years for HTGR and 4 years for molten salt
• While research into HTGR, fast reactors and molten salt reactors may one day yield dividends, few plants
are commercially viable yet. The International Atomic Energy Agency believes that at least another decade
is needed to commercialize molten salt reactors 14, and no country/company has constructed a reliable pebblebed HTGR. China’s small modular HTGR, currently the only operational facility of its type in the world, was
completed 11 years behind schedule and is operating well below capacity (in 2022 it only operated for 27 out
8,760 hours; this improved slightly in the subsequent three months when it operated at a still very low capacity
factor of just 10% 15). The DOE’s Liftoff report acknowledges that these designs require a long “burn-in” period
before achieving technological readiness 16
• While Russia and India are building sodium-cooled fast breeder reactors (FBRs), the US has avoided them
due to safety and cost concerns. FBRs “breed” more fuel than they consume, allowing the excess to be used
as fuel by light water reactors (LWRs); spent fuel from LWRs can then be used as fuel by FBRs. Despite the
elegance of this circularity, the US abandoned sodium-cooled FBRs due to concerns about higher cost, safety
in case of fire, nuclear proliferation and shorter service lives
“Can a closed nuclear plant from the ‘70s be brought back to life?”, WSJ, August 2024
14
“Molten Salt Reactor Technology Development Continues”, IAEA, April 2024
15
“The World Nuclear Industry Status Report 2023”, Mycle Schneider Consulting, December 2023
16
“Pathways to Commercial Liftoff: Advanced Nuclear”, DOE, September 2024
13
24
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Nuclear Renaissance
What about small modular reactors?
SMRs can be designed as smaller versions of traditional light water reactors, or using next-gen designs. More
than three dozen companies are working on plans to deliver SMRs, and there’s a 6.5 GW SMR pipeline in the US
with aggregate project costs of $176 billion. However, there’s not a single SMR project under construction in
the US and only NuScale has had its design approved by the NRC, a process that ended up costing ~$500 million
over six years (and that’s for a light water reactor design, not a next-gen).
•
Google signed a deal with Kairos for 500 MW from several SMRs to be delivered in the 2030-2035
timeframe. Kairos is still working on its demonstration reactor which it aims to be complete by 2027. Kairos
still needs to get construction and design permits from the NRC as well as permits from local agencies to
develop the reactors
•
Oklo intends to build liquid metal-cooled SMRs. It’s very early stage: in Sept 2024, Oklo was approved by
the DoE to conduct site investigations (geotechnical assessments, surveys, infrastructure planning). Oklo
has also been granted access to used nuclear fuel from a retired experimental breeder reactor operated by
the DoE for 30 years, and approval to build its own fuel fabrication facility. While its order book is reportedly
~1,350 MW, it is comprised of non-binding agreements that will be subject to customer offtake approval
based on the ultimate cost of completing the project (just NuScale’s aborted efforts in Utah)
•
Ultrasafe Nuclear Corporation filed for bankruptcy last year a year after signing a JV with a French company
that designs and produces nuclear components, burning through $200 mm in the process
Construction of the first SMR built in a Western country has begun in Canada by Ontario Power Generation
(BWRX-300, a GE-Hitachi design), if you count land grading and retaining walls as construction17. US utilities
are reportedly cautious and waiting to see its ultimate price tag before proceeding. GE-Hitachi designers
are attempting to reduce the volume of the building housing the reactor by 90%. Their methods: a more
simplified design that eliminates the need for certain safety systems, steel plates reducing the need for steel
rebar and a required staff of 75 people compared to 1,000 at large pressurized water reactors. That said,
some third party estimates of the plant’s possible cost are still way above the $2,000 per kW figure that the
US National Academy of Sciences cites as necessary for nuclear to compete with other generation sources
SMRs are still lottery tickets and will probably remain that way until the end of the decade at the earliest;
and I am still very skeptical of the ability to modularize and shrink the world’s most capital-intensive projects.
•
“As construction of first small modular reactor looms, prospective buyers wait for the final tally”, Globe and
Mail, December 27, 2024
17
25
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
DOGE Quixote
DOGE Quixote: the billionaires quest to reduce US government spending
Like Don Quixote and Sancho Panza, Vivek Ramaswamy and Elon Musk have set out on a quest to cut US
government spending. The goals: reduce $500 bn in Federal spending that Musk cited in a WSJ piece as being
unauthorized by Congress, and cut as much as $2 trillion from $6.75 trillion in FY 2024 government spending, a
figure Musk mentioned at an October rally at Madison Square Garden. [Note: as per my Top Ten List prediction
on page 43, I don’t think DOGE will get anywhere close]. According to the Washington Post, other billionaires
drafted into the DOGE effort include Palantir co-founder Joe Lonsdale, investor Marc Andreessen, hedge fund
manager Bill Ackman and former Uber CEO Travis Kalanick.
In this section we examine what lies ahead for DOGE, the Department of Government Efficiency. In the original
Cervantes novel Don Quixote, the concept of wisdom differs from intelligence and entails universality,
pragmatism and humility. Do Vivek and Elon qualify? I don’t think so but your mileage may vary.
“Don Quixote and Sancho Panza”, Honoré Daumier, 1865-1867
Getting started: reversing Biden executive actions. The Committee for a Responsible Federal Budget recently
cited possible savings from reversing certain Biden executive actions, a process which would not require any
Congressional approval 18. On an annual basis, the executive action repeals identified below would save ~$100
billion per year; but to the extent that these are reductions in future planned additional spending, it’s not the
same as cutting existing programs. Regarding student loans, potential savings would have been higher but the
Biden administration withdrew two of its proposed deficit-increasing student cancellation rules last month.
Savings from Reversing President Biden's Executive Actions, billions of US$
Healthcare executive action repeals
Medicaid financing
Medicaid eligibility
Medicare Part D rebates
ACA self-only coverage ("family glitch fix")
Medicaid nursing home staffing
$ bn
140
75
65
40
25
Other executive action repeals
SNAP Thrifty Food Plan
Vehicle carbon emissions/EV credits
SSDI past work period
SSI expansion
IRS enforcement restrictions on <$400k
Student debt executive action repeals
SAVE program
Closed school rules
$ bn
275
15
Total 10-year savings
Annual savings
$ bn
180
150
20
20
20
1,025
103
Source: Committee for a Responsible Federal Budget, November 26, 2024. ACA Affordable Care Act; SSDI Social
Security Disability Insurance; SSI Supplemental Security Income
18
“Reversing Biden Executive Actions Could Save up to $1.4 Trillion”, CRFB, November 26, 2024
26
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
DOGE Quixote
The table above highlights an important aspect of government outlays: entitlements dominate government
spending rather than non-defense discretionary items, which have been cut by prior agreements such as the
Budget Control Act of 2011. Is there still wasteful non-defense discretionary spending to cut? Certainly; the
question is how much, particularly when its largest categories are politically sensitive veterans benefits and
infrastructure funding for highways.
What does the Federal government spend money on?
Breakdown of US entitlement spending
16%
14%
% of GDP, with ratio of entitlement to non-defense discretionary
2023:
2015: 3.3x
3.1x
Entitlement spending
4%
Source: CBO, JPMAM, 2024. Dots are CBO projections
2022
2019
2001
1998
1992
1995
2035
1989
2025
1986
2015
1983
2005
1980
1995
1977
1985
1974
1975
1971
0%
Non-defense discretionary spending
1968
2%
1965
Social Security
2%
4%
2016
1970:
1.1x
1965
6%
Medicare
6%
2013
1990:
2.0x
8%
Medicaid
8%
2000:
2.4x
2010
10%
Federal civilian and
military retirement
10%
2007
12%
Veterans' programs
12%
2004
14%
2034:
5.0x
% of GDP
Source: CBO, JPMAM, 2024
Firing federal workers. DOGE reportedly intends to close government agencies, compel voluntary departures
by requiring full-time office work and move certain functions outside of Washington DC to places that are closer
to where the services are provided. That said, Federal employment of 3 mm people is at its lowest level as a
share of US employment in 85 years (~2%). Within Federal workers, the largest employer is the Dep’t of Defense
(excluding active military) followed by the Postal Service and Veterans Affairs. As for agencies in DOGE
crosshairs: the Environmental Protection Agency, Securities and Exchange Commission and Department of Labor
when combined account for less than 1% of federal workers, while the Department of Education accounts for
just 0.14%. Higher government worker figures often cited include 5.5 mm state and 15 mm local government
workers, the largest share of which are 7 mm teachers and 2.4 mm police, fire and correctional officers.
Government employees as share of all employees
Percent of all employees
20%
Breakdown of Federal workers, 2023
18%
16%
14%
12%
Local
10%
8%
6%
4%
2%
State
EPA+
SEC+
DoL, 1%
Federal
0%
1955 1960 1966 1972 1978 1984 1990 1995 2001 2007 2013 2019
Source: FRED, JPMAM, October 2024
Source: Bloomberg, JPMAM, November 2024
While Trump might reclassify some career civil servants as at-will Schedule F political appointees that can be
fired, this might affect just 50k people and wouldn’t move the needle much. To achieve $50 billion in savings
on Federal employees, Trump’s administration would have to fire over 500,000 people. The last large-scale
Federal workforce reduction of that magnitude: when Clinton reduced the Defense department by 350,000
during the 1990’s peace dividend era.
27
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
DOGE Quixote
Restrictions on Presidential impoundment of revenues raised by Congress. The Impoundment Control Act of
1974 limits a President's ability to decline to spend funds that Congress appropriates for a particular purpose,
or to use those funds in ways other than what Congress specified. Trump nevertheless stated that he intends
to impound funds Congress appropriates for certain agencies and programs, arguing that restrictions on the
President's discretion in this regard are unconstitutional. Trump's former OMB Director Russell Vought (who
Trump announced will be re-appointed) laid out an expansive view of Presidential authority to decline to spend
appropriated funds in a letter to the House Budget Committee at the end of Trump's last term. Trump may also
attempt to use “pocket rescissions” to shrink federal agencies or programs. Either way, any impoundment will
almost certainly be challenged in the courts, a process that could take months or years to resolve.
Weight loss drugs (GLPs) and Medicare coverage. Government outlays for coverage of weight loss drugs may
increase just as DOGE is trying to cut other government spending. Medicare now covers GLPs like Ozempic and
Wegovy for 11 million out of the 14 million obese and overweight people in the Medicare pool, either because
they have Type II Diabetes, and/or (since early 2024) they have a combination of cardiovascular disease and
obesity 19. Then in November, Biden proposed having Medicare and Medicaid cover GLPs for those with obesity
alone which would add coverage for another 7.4 million people 20. Cost estimates differ: $20-$30 billion over
10 years according to the CBO, and $140 billion according to the Penn Wharton Budget Model 21. If GLP coverage
expanded to those with obesity OR cardiovascular disease, that could expand the Medicare eligibility pool by 10
million people according to estimates from KFF and CMS.
In other words: rising GLP coverage would offset DOGE cost-cutting in other areas, even if semaglutide (the
active ingredient in GLPs) is included in the government’s price negotiations with the drug industry in 2025.
Elon Musk is not a constitutional lawyer. In a November 2024 WSJ Op-Ed, Musk claimed that the Administrative
Procedures Act ("APA") would not constrain a President from making deep cuts to federal agencies or turning
many career civil service positions into political appointments so that those federal employees may be fired at
will. Musk stated that the President is not bound by the APA; on that point, I believe that he is largely correct.
The Supreme Court has held that the President is not an "agency" under that statute, even when his actions
involve agencies. However, the President still remains subject to a range of other restrictions:
•
Federal statutes establish and require the existence of cabinet-level departments and many other federal
agencies. Some laws go further, establishing offices/divisions and imposing requirements concerning their
structure, and also spell out explicit functions that such offices must carry out and/or disbursements they
must make. Example: the Department of Education Organization Act of 1979 requires the creation of offices
within the Department of Education such as the Office of Civil Rights and Office of Correctional Education;
it requires the Department to approve state plans for federal grants under the Elementary and Secondary
Education Act, and explicitly prohibits the Secretary from eliminating any such statutorily established units
Collective bargaining agreements with unionized federal employees may also limit an Administration's
ability to materially alter terms of employment, for example, by reducing or eliminating telework policies
In other words: attempts to eliminate agencies or their related functions, or to refuse to spend their
appropriations, would generally be subject to substantial legal challenges
•
End of Chevron Deference. After Trump’s majority on the Supreme Court tossed out the Chevron Deference
standard last year, Trump administration agencies may ironically be subject to more judicial challenges of their
decisions and interpretations, reducing their ability to unilaterally promulgate rules.
“A New Use for Wegovy”, KFF, April 2024
Such a step would be prohibited by the Medicare Modernization Act of 2003. A change would require formal
Agency rulemaking whose comment period and ultimate approval would extend into the Trump Administration.
If the rule were successfully challenged and overturned, Congress could still pass legislation approving it. A key
feature of any GLP rule or legislation: would coverage be permanent or temporary?
21
“Authorizing Medicare and Medicaid to Cover Anti-Obesity Medication”, Wharton, November 27, 2024
19
20
28
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
DOGE Quixote
Defense procurement costs. Defense spending inflation has risen 25% faster than overall inflation since WWII.
One possible contributor: the prevalence of directly negotiated non-competitive defense contracts is roughly
the same as competitive contracts 22. While evidence that competitive contracts consistently result in lower
costs is mixed, their broad use raises questions about the non-competitive process and cost outcomes.
The relative price of defense spending
Defense contract obligations by solicitation procedure
130
$300
Relative price: growth in defense deflator vs overall GDP deflator
2020 US$, billions
125
$275
120
$250
Competitive
Non-competitive
$225
115
$200
110
$175
105
$150
100
$125
95
$100
90
1947
1957
1967
1977
Source: BEA, JPMAM, 2023
1987
1997
2007
2017
$75
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Source: Reilly (George Mason University), 2023
Defense procurements (weapons systems) only represent 15%-20% of the total military budget, with personnel
and operations/maintenance representing a much larger combined share. Procurement cost overrruns are
common across all branches; are highest for DoD-wide programs like the F-35 Joint Strike Fighter; and are higher
for cost-plus contract types compared to fixed price.
Cost overruns by lead service
US defense spending by category
Real cost overrun, percent
Percent of total defense discretionary outlays
40%
1973
35%
2023
45%
40%
30%
35%
25%
30%
20%
25%
15%
20%
10%
15%
5%
10%
0%
5%
Military
Other
Operations &
Procurement
personnel
maintenance
Source: OMB, Peterson Foundation, 2023. Other mostly includes R&D, military
construction and family housing
Average overrun
Average overrun weighted by estimated
acquisition cost
0%
Navy
Army
Source: CSIS, JPMAM, April 2011
Air Force
DoD-wide
Cost overruns by contract type
Nominal cost overrun, percent
45%
40%
35%
30%
Average overrun
Average overrun weighted by estimated
acquisition cost
25%
20%
15%
10%
5%
0%
Fixed price
Combination
Cost-plus
Other*
Source: CSIS, JPMAM, April 2011. *Other includes time and materials
contracts and labor hours contracts
22
On competitive bidding for weapons procurement:
the Federal government faces a high degree of
both concentration and specialization. After the
Clinton era reduction in military spending, the
number of prime defense contractors fell from 51
to five (Lockheed, GD, RTX, Northrup, Boeing)
Also: any savings from competitive bidding might
end up being plowed back into new weapons
programs rather than reducing the defense budget
“The political economy of rising defense costs”, Reilly (George Mason University), 2023
29
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
DOGE Quixote
Some of the largest cost overrruns are shown below by category and program. For example: 50% of all
helicopter programs breached significant or critical cost overrun thresholds. On “cost breach rates”: the 1982
Nunn-McCurdy Act requires the Department of Defense to alert Congress if a major project has cost growth
above certain thresholds vs baseline (30% = significant overrun, 50% = critical overrun) and perform an in-depth
project review and restructuring. In the table on the right, we show the largest 10 cost overruns vs baseline
over the last decade. While the DoD reports a lower rate of Nunn-McCurdy breaches in recent years, the DoD
has failed its last several audits with no improvement in the number of material weaknesses from 2018 to 2024.
Nunn-McCurdy cost breach rates, 1997-2021
# of program s
Total # of
that ever
program s
breached
Chem demilitarization
Space launch
Helicopter
Fixed-w ing aircraft
Satellite
UAV
Ship/submarine
C4ISR
Ground vehicle
Munition/missile
Missile defense
Total
4
1
20
29
16
7
24
57
14
34
9
215
Source: DoD 2023 Defense Acquisition Report
4
1
10
10
5
2
6
13
3
10
1
65
Cumulative cost growth vs baseline, top ten from 2010-2021
Breach rate
100%
100%
50%
34%
31%
29%
25%
23%
21%
29%
11%
30%
Project
Description
C-130J
Hercules transport aircraft
Cost growth
3267%
GMLRS/GMLRS AW Guided rocket launch system
1086%
MH-60S
Fleet combat support helicopter
871%
AIM-9X Blk II
Air Intercept Missile
335%
SBIRS High
Space-Based Infrared System
229%
EFV
Expeditionary Fighting Vehicle
213%
MIDS
Information distribution system
211%
F-35
F-35 joint strike fighter jet
193%
DDG 1000
Guided missile
191%
NSSL
National Security Space Launch
187%
Source: DoD 2023 Defense Acquisition Report
One last comment on US military spending. I prepared this chart in 2015 on the cost of the Iraq War and what
$2.2 trillion could have been spent on instead. The best way to reduce outlays on military expenditures and
allocate more money to domestic growth: avoid unnecessary foreign wars.
The staggering financial opportunity cost of the Iraq War
2014 USD trillions
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
Includes personnel,
weapons, medical
and disability care
for soldiers during
and after the war,
related homeland
security costs and
interest costs
Cost of Iraq War
Civil aviation and air
traffic control
Dams
Roads
Bridges
Electricity grid
Drinking and waste
water facilities
Levees
Rails
Schools
Public Mass Transit
Hazardous waste
Waterways
Fixing America's
infrastructure
Mine clean-up, broadband
access to all US households
Tuition, full room &
board for every
college-bound high
school graduate
needing any
financial aid, 20032021 (four-year
public university)
HVDC transmission grid
Universal Pre-K (30yrs)
Protection against 1m rise in
sea level
5 high-speed train systems
Bury key resid. power lines
(10% of total)
PEV subsidy for 50% of
passenger car fleet
College education
Various
Source: Brown University Watson Institute for International and Public Affairs; Neta Crawford, Boston University (cost of Iraq War); College Board; US Dept.
of Education; Edison Electric Institute; American Society of Civil Engineers; Earthworks; Hall Energy Consulting; Next Big Future; Northwestern University;
FCC; Vrije Universiteit; US Dept. of Transportation; National Affairs; US Dept. of the Interior; Scientific American; US Dept. of Energy; EIA; JPMAM. 2015.
30
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
DOGE Quixote
The Festivus of government overpayments. Whenever I see Senator Rand Paul’s annual Festivus report on
wasteful government spending, I roll my eyes since $659 billion out of the $900 billion of waste that Paul cites
is interest on the Federal debt. In other words, not something you can just cut. However, his report does
highlight something notable: $2.7 trillion of Federal government agency “improper payments” since 2003 and
$236 billion in 2023 alone, according to a General Accounting Office (GAO) annual report 23.
Improper payments are defined by the GAO as those that should not have been made or were made in the
incorrect amount. The two most common causes: failure of agencies to determine whether a recipient should
receive the payment, and information access restrictions that prevent verification that a payment is proper.
While this might seem easy to remedy and be an easy source of savings, there are some caveats:
•
New investment. The systems required to prevent improper payments in advance are more sophisticated
and costly than the systems required to identify and estimate them after the fact
•
Federal vs state/local. Some Federal programs are implemented locally by states where any improper
payment reductions would have to take place
Audits. To reduce improper payments to Earned Income Tax recipients, the IRS would need to perform mass
audits of low-income families, which could be very politically unpopular; and require more resources
My contacts in DC including at the Committee for a Responsible Federal Budget don’t have enormous confidence
in the process used to create these estimates; and also believe that a 10%-20% reduction in improper payments
would be a huge achievement.
•
Improper payment estimates by program, fiscal year 2023
GAO estimates of improper payments by agencies
US$, billions
US$, billions
$300
All other programs
$50
$250
Paycheck
protection
program loan
forgiveness
$19
$200
$150
$100
Medicaid
$50
Earned income
tax credit
$22
Fiscal year
Source: US Government Accountability Office, March 2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
$50
$0
Medicare
$51
Federal pandemic
unemployment assistance
$44
Source: US Government Accountability Office, March 2024
The bottom line for DOGE:
•
There are savings to be had from reversing Biden executive actions but they wouldn’t count towards DOGE
targets for reducing current spending
•
Non-defense discretionary spending has already been cut, and is at its lowest level in decades
•
Entitlements are a political third rail, as DOGE billionaires are now finding out
•
SEC, DOL, Education and EPA staff is very small at less than 2% of all Federal workers
•
Expanding weight loss drug coverage may offset DOGE savings elsewhere
•
Impounding or redirecting Congressionally appropriated spending will face judicial challenges
•
Most defense spending is people and operations rather than weapons procurements
•
Concentration of defense contractors makes it difficult to cut procurement costs
•
Reducing improper/fraudulent payments will take substantial investment in systems and people
Vaya con Dios, DOGE Quixote!
23
“Improper Payments: Information on Agencies Fiscal Year 2023 Estimates”, GAO, March 26, 2024
31
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
China
China: the liquidity trap and the Thucydides trap
China is experiencing some kind of liquidity trap: money supply growth is declining; despite cutting bank reserve
requirements, loan demand is falling; interest rates are plummeting; and there’s no sign of a bottom yet in
residential real estate. Barclays actually reported that China has surpassed Japan on its Japanification Index 24,
which measures actual vs real growth, natural real rates of interest, real interest rates, nominal interest rates
and deflation. That explains the aggressive stimulus program China announced last year. Bridgewater estimates
that current and future expected stimulus in China will offset roughly half of the ongoing drag in Chinese
economic conditions.
China's M2 money supply
China bank loans and reserve requirements
30%
14%
Percent, y/y
Percent, y/y
Percent
18%
17%
13%
25%
12%
20%
15%
16%
Total loans
15%
11%
14%
10%
13%
12%
9%
10%
5%
1996 1999 2002 2005 2008 2011 2014 2017 2020 2023
7%
2017
11%
Reserve ratio
requirements
8%
Includes: cash, checking/savings accounts,
CDs and retail money market funds
2018
2019
2020
2021
2022
2023
10%
2024
Source: Bloomberg, JPMAM, November 30, 2024
Source: Bloomberg, JPMAM, December 27, 2024
China residential floor space starts
China economic activity monitor (Bloomberg)
300
9%
Square meters, millions
2025
9%
Percent, y/y change
8%
250
7%
200
6%
150
Exports, coal and electricity
consumption, steel production, motor
vehicle sales, real estate investment,
medicine consumption, telecom
equipment production, SOE output,
private enterprise output
5%
4%
100
3%
50
2%
0
'00 '02 '04 '06 '08 '10 '12 '14 '16
Source: Bloomberg, JPMAM, November 30, 2024
'18
'20
'22
'24
1%
2022
2023
Source: Bloomberg, November 30, 2024
2024
Impact on growth of major policies China has announced
since September 2024, Annualized impact on growth, %
1.0%
0.5%
0.0%
-0.5%
-1.0%
Expected growth impact
Current growth impact
Deleveraging drag
-1.5%
-2.0%
September Saved
Local gov Expected
stimulus interest due money
deficit
package
to debt freed from expansion
swap
debt swap
Source: Bridgewater, November 2024
24
Total
impulse
Rough
estimate of
drag
“Is China having its ‘big bazooka’ moment?”, Barclays, November 2024
32
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
China
The stimulus plan gave a large boost to Chinese equities when it was announced. Onshore China A shares
soared and have retained most of their gains so far, while the MSCI China Index has given back roughly half of
its initial gains. I believe that China intends to follow through with monetary and fiscal stimulus commitments,
if for no other reason that it may seek to dampen the impact of whatever tariffs the US imposes. Even before
the stimulus was announced, Chinese bank stocks had been recovering from rock bottom valuations.
Chinese bank valuations
China equity valuations
Average price to book ratio
Forward price-to-earnings ratio
22x
20x
China A Shares
2.0x
Post-stimulus peak
Current value
18x
1.6x
1.4x
16x
1.2x
14x
1.0x
12x
10x
Banks included: Industrial and Commercial
Bank of China, China Construction Bank,
Agricultural Bank of China, Bank of China
1.8x
0.8x
MSCI China
8x
2014
2020
2016
2018
Source: Bloomberg, JPMAM, December 27, 2024
0.6x
2022
2024
0.4x
2010
2012
2014
2016
2018
2020
2022
2024
Source: Bloomberg, JPMAM, December 27, 2024
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
However, as I explained last October 25, investors in China have to deal not only with a liquidity trap but also
with a Thucydides Trap. The latter refers to the ongoing political tensions between the US and China which
have been exacerbated by intensification of Chinese espionage. I have listed some excerpts from our October
piece below but just to keep you updated on how ridiculous this is getting, on December 30th 2024 the US
Treasury disclosed that a Chinese “state sponsored actor” hacked into classified documents at the Treasury,
breaking into a system regrettably called “BeyondTrust” 26.
Here are excerpts from October’s piece on the rising frequency and severity of Chinese espionage:
•
In 2024, the FBI revealed that a Chinese state-linked firm hacked 260,000 internet-connected cameras,
routers and other devices; systems the US government uses for court-authorized network wiretapping
requests; and the US Office of Personnel Management database (sensitive information obtained during high
level government security clearances, exposing 22 million current and former officials to extortion)
•
Chinese “Volt Typhoon” hackers have hijacked hundreds of routers and used them to infiltrate US transport,
telecom, water and electricity networks, and Chinese cargo cranes used at US ports have embedded
technology that could allow Beijing to secretly control them. FBI Director Wray: “China's hackers are
positioning on US infrastructure in preparation to wreak havoc and cause real-world harm to American
citizens and communities, if and when China decides the time has come to strike”
“The Thucydides Trap on the China Equity Trade”, Eye on the Market, October 17, 2024. The citations above
from our October piece were obtained from public sources including Foreign Policy, NPR, WSJ, Wired, BBC, CSIS,
Georgetown Security Review and the US Congressional Committee on Oversight and Accountability
26
“China hacked Treasury Department in Major Breach”, NYT, December 30, 2024
25
33
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
China
2025 OUTLOOK
•
Also from Wray: China has made economic espionage a central component of its national strategy, has a
bigger hacking program than that of every other major nation combined, and has stolen more of Americans’
personal and corporate data than every nation combined
•
Chinese cyberattacks now target virtually every sector: healthcare, financial services, defense, energy,
government facilities, chemicals, automotive, aerospace, communications, IT (including managed service
providers), international trade, education, video gaming, faith-based organizations and law firms
•
Between 1987 and 2021, at least 162 Chinese scientists that had worked at Los Alamos (home to US military
R&D on hypersonics, deep-earth penetrating warheads, unmanned autonomous vehicles and submarine
noise reduction) returned to China to support its own military R&D
•
Many Chinese airpower systems share similarities with US platforms such as the F-16, F-22 and F-35 fighters,
the MQ-9 Reaper drone and the C-17 Globemaster III. Beyond aircraft, China has also stolen information
on the Patriot missile system, the Littoral Combat Ship, nanotechnology, directed energy systems, space
surveillance telescopes, tactical data links and drone video systems, all of which Chinese hackers reached
through networks of private defense companies working with the Pentagon
•
Since 2000, China has been associated with 90 cyber espionage campaigns, 30% more than Russia. The
actual number is likely higher and each instance sees multiple businesses targeted that overlap priority
industries specified in China’s “Made in China 2025” plan
•
At a recent gathering of US, UK, Australia Canada and New Zealand security chiefs, the head of the UK MI5
stated that China has been engaging in sustained espionage on “an epic scale”, contacting over 20,000 UK
individuals online including those at companies linked to military supply chains
According to Harvard historian Calder Walton, Chinese businesses are required to work with its intelligence
services when requested; these intelligence services are now “effectively silent partners in Chinese
commerce with the outside world”. Even Chinese companies that are not state-owned enterprises are in
practice subject to laws that compel them to provide open access and information to the Chinese
government. Foreign companies in JVs are required to allow Communist Party cells to be established inside
them, enabling theft of technology, IP and data through the worldwide reach of the company’s networks
While Trump might not ratchet US tariffs on China to maximum levels, I find it difficult to believe that a
rapprochement between the US and China will occur anytime soon. Instead, frictions related to trade, foreign
direct investment and rare earth metals may continue. As one example, after US officials visited Taiwan last
November, TSMC notified its advanced AI chip customers in China that it would no longer produce 7 nanometer
or lower chips for them 27. Since 70% of TSMC sales go to US buyers, the US tariff threat is substantial. This all
follows the discovery last October that advanced TSMC chips were still found in Huawei Ascend 910B processors.
•
If so, such frictions may result in an effective cap on
MSCI China equity multiples somewhere around 12x;
the days of 14x-16x multiples on China equities may
be a thing of the past.
MSCI China valuations
Forward price-to-earnings ratio
30x
25x
20x
15x
10x
5x
2006
2011
2016
Source: Bloomberg, JPMAM, December 27, 2024
27
2021
“US ordered TSMC to halt shipments to China of chips used in AI applications”, Reuters, November 10, 2024
34
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Europe
Dr. Seuss Goes to Europe
I do not like them near the Seine, or in the forest of Ardennes…
Labor productivity based on output
Labor productivity based on employee compensation
120
112
Index (100 = 12/31/2016)
Index (100 = 12/31/2016)
US
EU
115
US
Euro area
110
108
110
106
105
104
100
102
95
100
90
2017
2018
2019
2020
2021
2022
2023
2024
Source: BLS, EU Statistical Office, Bloomberg, JPMAM, September 2024
98
2022
2023
2017
2018
2019
2020
2021
Source: BEA, European Commission, Bloomberg, JPMAM, 2024
2024
I do not like them near Alsace, or Boulevard de Montparnasse 28…
Energy prices in the Euro area relative to the US
European manufacturing output by energy intensity
6x
125
Ratio, 12 month moving average
Based on country-specific industry and energy mix
differences; incorprorates gas, oil, coal and electricity
Index (100 = December 2019)
Low energy
manufacturing
120
5x
115
110
4x
105
100
3x
High energy
manufacturing
95
90
2x
Germany energy
intensive manufacturing
85
1x
2018
2019
2020
2021
2022
2023
2024
Source: ECB Monetary Policy Report, 2024
Total
manufacturing
80
2019
2020
2021
2022
2023
2024
Source: ECB, German Federal Statistical Office, October 2024
Not anywhere near Neuschwanstein, or in a boat atop the Rhine…
One-size-fits-all policy not well suited for Eurozone
Standard deviation of business cycle proxy (employment to population
ratio) across countries/regions
7%
6%
11 Eurozone countries
Correlation* = 0.56
Labor mobility, US vs Europe
From US state to US state
From EU-28 to EU-28
5%
From EU-28 to EU-15
4%
3%
9 US BLS regions
Correlation* = 0.94
2%
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: OECD, BLS, JPMAM, October 2024. *Avg pairwise correlation
From EU-15 to EU-15
0%
10%
20%
30%
Share of US or EU working age population
Source: IZA Journal of Migration, 2016
Green Regs and Hamburg. The new EU Corporate Sustainability Due Diligence Directive requires large
companies operating in the EU to comply with its rules on carbon emissions and labor/human rights or face EU
fines as high as 5% of the company’s global revenues. Qatar has already threatened to halt all LNG exports to
the EU if it is fined under the new law. I’m sure this is all going to work out fine for Europe.
28
35
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Europe
Not at the Baths of Caracalla, or at Teatro alla Scala…
Other than healthcare, US ROE and ROA higher than
Europe across sectors
Return on Assets
Consumer Staples
3 month earnings revisions trend
Net EPS revisions (upgrades - downgrades/no. changes)
20%
Return on Equity
US
Europe
US
Europe
7.2
4.4
24.7
13.3
Japan
15%
US
10%
Europe
5%
Consumer Discretionary
7.8
4.4
30.0
11.8
Technology
12.6
5.8
28.9
11.4
Healthcare
4.4
6.3
12.7
15.1
Communication Services
7.2
2.0
17.8
6.9
-10%
Financials
1.4
0.7
12.9
12.5
-15%
Industrials
6.6
4.9
23.2
16.5
-20%
Real Estate
3.0
-1.8
7.2
-4.7
-25%
Dec-22
Apr-23
Aug-23
Dec-23
Source: Datastream, JPMAM, October 2024
0%
-5%
Source: Bloomberg, JPMAM, December 27, 2024
Apr-24
Aug-24
Not on my way to Salamanca, which isn’t far from Casablanca…
Decomposition of US equity outperformance vs Europe since 2009
Total return index (100 = Dec 2009)
750
MSCI US
650
v. Intra-sector: US financials outperform European financials
550
iv. Intra-sector: US consumer discretionary outperforms European consumer discretionary
iii. Intra-sector: US tech outperforms European tech
450
ii. Sector weight differences: US O/W tech, Europe O/W financials, industrials & staples
350
i. Currency: outperformance of US$ vs EUR
250
MSCI Europe in US$
150
50
2010 2012 2014 2016 2018 2020
Source: Bloomberg, JPMAM, December 27, 2024
2022
2024
Not even at Trafalgar Square…I do not like them anywhere
Overweight US, underweight Europe
3-year rolling out (under) performance vs MSCI All World Index
4%
2%
0%
-2%
-4%
-6%
1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024
Source: Bloomberg, JPMAM. September 2024. All equity portfolio,
rebalanced quarterly. O/W US by 10%; U/W EUR by -10%;;. Assumes no
currency hedging. Past performance is not indicative of future results
Creation of new public companies in the 21st century
Cumulative market cap in trillions of US$
18
16
US
14
EU
12
10
Industria de
Diseno Textil
Airbus
Equinor
Porsche
Adyen
8
6
4
2
0
0
50
Alphabet
Meta
Tesla
Visa
Mastercard
Netflix
Salesforce
T-Mobile
ServiceNow
Accenture
100
150
Number of companies
Source: Bloomberg, JPMAM, December 17, 2024
200
36
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Crypto
The crypto Presidency: on the crypto rally and the sky-high return on political donations
In February 2022, I wrote a skeptical piece on crypto called “The Maltese Falcoin”. To be clear, I am not qualified
to opine on crypto legal issues (is it a security or commodity, who should regulate it), or its societal benefits and
drawbacks (facilitation of criminal activity). I only focused on crypto’s merits as an investment. In the piece, I
expressed doubt on the Bitcoin store of value thesis and expressed skepticism regarding decentralized finance
and transactions-focused coins like Ripple, Stellar, Monero and Litecoin. Given the rally in many crypto assets,
it’s a good time to see what I got right and what I got wrong. Short answer: wrong on Bitcoin; mostly right
about Decentralized Finance and Transactions-focused coins, at least until the November 2024 election after
which all crypto assets began to soar.
Crypto adoption. When I wrote the piece, there were ~320 million crypto account holders; that number has
risen to ~560 million. Retail owners (less than 1 BTC) have risen from 6.8% of ownership in 2020 to 9.5%.
Bitcoin: digital assets as a store of value. Bitcoin fell by 65% after I wrote the piece but has rebounded to 2.6x
its February 2022 value. At the end of The Maltese Falcoin, I wrote that I would take another look if Bitcoin
plummeted. After a 65% decline by early 2023 I should have done exactly that, but I didn’t. After the SEC
approved spot Bitcoin ETFs in January 2024, nine were launched and already had $16 billion of inflows by the
end of February and $4 billion in average daily trading volume by March. The day after the November 2024
election, US Bitcoin ETFs received over $600 mm of inflows, one of the highest days on record.
Bitcoin: a store of value
Crypto coin prices by segment, market cap weighted
$115,000
250
US$
$105,000
Indexed (100 = 1/1/2022), rebalanced semiannually
"Maltese Falcoin"
Eye on the Market
225
$95,000
200
$85,000
175
$75,000
150
$65,000
$55,000
$45,000
"Maltese Falcoin"
Eye on the Market
Bitcoin
Transactions-focused basket
Decentralized finance basket
125
SEC approves launch of
spot Bitcoin ETFs
100
$35,000
75
$25,000
50
$15,000
2022
2023
2024
Source: Bloomberg, JPMAM, December 27, 2024
2025
25
2023
2022
2024
Source: Bloomberg, JPMAM, December 27, 2024
2025
Transactions-focused coins. After the Maltese Falcoin piece, most transactions-focused coins fell sharply and
stayed there for almost three years. After Trump was elected, transactions-focused coin values rose sharply,
particularly Ripple. If their value proposition is increased utilization, I don’t see it: as shown, most volumes
haven’t changed much since 2022. As a result, recent gains appear highly speculative, at least so far.
Transactions-focused coin values
Transactions per day on blockchains, 7 day average
350
3
Indexed (100 = 1/1/2022)
300
250
"Maltese Falcoin"
Eye on the Market
Millions
Ripple
Stellar
Bitcoin cash
Monero
Litecoin
2
Ripple
Litecoin
Bitcoin cash
Monero
Stellar (right axis)
200
8
7
6
5
150
1
100
4
3
50
0
2022
2023
2024
Source: Bloomberg, JPMAM, December 27, 2024
Millions
2025
0
2022
2023
2024
Source: BitInfoCharts, The Block, JPMAM, December 26, 2024
2
2025
37
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Crypto
Is Ripple rallying since it has one of the fastest execution times at just 4 seconds? I doubt it; the best explanation
might be the departure of its critics at the SEC. Transactions-focused coin volumes may continue to flatline
due to competition from stablecoins, which due to their mostly collateralized nature are not directional crypto
investments per se. There are interesting questions about stablecoin economics as regulation is harmonized
across borders, and as rate declines reduce yield arbitrage from stablecoin collateral. I still get the sense that
stablecoins are used more for crypto trading than for cross-border remittances. While the cost of sending
money on blockchains is generally lower than bank or Western Union payment rails, remittance recipients in
developing countries that convert back into local currency often incur similar all-in costs.
Decentralized finance. This category refers to activities that disintermediate financial services by migrating them
to permission-less blockchains. One way to measure the uptake of DeFi is to look at “total value locked”, which
is the amount of crypto collateral deposited in DeFi applications. It’s imperfect due to double counting and
leverage, but it’s a decent proxy for DeFi activity.
I wrote in 2022 that most DeFi lending seems associated with overcollateralized loans to other holders of crypto,
so that those holders can either buy more crypto or obtain liquidity against appreciated crypto holdings without
incurring capital gains taxes. As a result, should crypto prices decline, DeFi activity would presumably collapse
as well given the circularity. Well, that’s exactly what happened during the 2022-2023 collapse and the
subsequent recovery: crypto prices and total value locked in move in tandem, as shown below.
Nothing has changed about this dynamic as far as I can tell: DeFi activity is still linked to the level of crypto prices.
In other words, I don’t see evidence of a thriving DeFi market that is immune from crypto prices in which people
execute leases, mortgages, derivatives and other contracts. Since 2022, prices for DeFi coins collapsed and then
recovered to early 2022 values, while Tron soared as it now rivals Ethereum as the largest stablecoin trading
platform. Note how the number of Ethereum daily contracts is back to roughly the same level as early 2022.
Decentralized Finance coin values
Total value locked in DeFi platforms
600
$100
Indexed (100 = 1/1/2022)
500
"Maltese Falcoin"
Eye on the Market
400
US$, billions
TRON
Binance
Solana
Ethereum
Cardano
$90
$80
$70
$60
$40
200
$30
$20
100
$10
0
2022
2023
2024
Source: Bloomberg, JPMAM, December 27, 2024
Ethereum price vs total value locked in
US$, billions
$90
$80
$70
$60
Ethereum
TRON
Solana
Binance
Cardano
$50
300
$100
"Maltese Falcoin"
Eye on the Market
"Maltese Falcoin"
Eye on the Market
Total value locked in
Ethereum (lhs)
Ethereum price (rhs)
$50
$40
$30
$20
2022
2023
2024
Source: Bloomberg, DeFi Llama, JPMAM, December 27, 2024
2025
$0
2022
2023
2024
Source: DeFi Llama, JPMAM, December 27, 2024
2025
Ethereum daily verified contracts
US$ Total verified contracts per day, 7 day avg
$4,500 1,100
$4,000
$3,500
900
$3,000
700
$2,500
500
$2,000
$1,500
$1,000
2025
"Maltese Falcoin"
Eye on the Market
300
100
2022
2023
2024
Source: Etherscan, JPMAM. December 27, 2024
2025
38
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Crypto
The crypto Presidency and its allies in Congress:
•
Members of Congress have proposed a US Strategic Bitcoin Reserve whose exact purpose is unclear to me,
other than to enrich Bitcoin holders by reducing supply. Any parallels to the Strategic Petroleum Reserve,
which was so poorly managed by the Biden administration, are absurd. If a Bitcoin Reserve were funded
from Fed remittances to the Treasury, those are now negative given the rise in rates. Bitcoin assets seized
by the government might have to represent the starting point for any reserve
•
SEC nominee Paul Atkins, a prior SEC commissioner under George Bush, is in favor of boosting US domestic
crypto businesses in contrast to his predecessor
•
Crypto-related Political Action Committees and other groups tied to the crypto industry received $245 mm
in donations according to the Federal Election Commission; that’s roughly half of all corporate donations
made during the 2024 Presidential Election29. As one example, Coinbase gave $75 million to a super-PAC
called Fairshake whose candidates won almost every race they got involved in
•
According to the “Stand with Crypto” alliance launched by Coinbase, there are now 300 pro-crypto members
of the Senate and the House. Coinbase CEO Brian Armstrong tweeted “Welcome to America’s most procrypto Congress ever”, and Ripple’s CEO declared that the “War on Crypto is Over” while also pledging $5
million to Trump’s inauguration fund
•
GOP Majority Leader Scalise pledges a pro-crypto bill in the first 100 days along the lines of the proposed
Financial Innovation and Technology for the 21st Century Act, Trump has announced a crypto council run by
a crypto czar, and the SEC will probably roll back crypto accounting disclosure rules
At the same time, the latest institutional ownership surveys appear to be positive for digital assets.
From The Economist 30:
•
Institutional allocations to digital assets may rise to 7% by 2027 vs current allocations of 1%-5%
•
70% of institutional investors plan to increase exposure to digital assets over the next 3 years
• Institutional investors are considering direct investments (51%), staking (33%) and crypto derivatives (32%)
From Global Digital Finance 31:
• 93% of financial institutions now handle Bitcoin in some shape or form, primarily driven by crypto ETFs
From Nomura 32:
• 54% of Japanese institutional investors plan to invest in crypto in the next 3 years with allocations of 2%-5%
From a KPMG survey of Canadian institutional investors 33:
•
39% of institutional investors had some exposure to crypto in 2023 vs 31% in 2021
•
33% have at least 10% of their portfolio in crypto vs 20% in 2021
•
67% cite maturing market and custody infrastructure as the reason for crypto investment vs 14% in 2021,
and 58% cite strong market performance as reason for investment
Meanwhile, like the Irish monks who transcribed Roman documents during the Dark Ages, crypto opponents
maintain their resistance. From John Reed Stark, a former Chief at the SEC Office of Internet Enforcement:
Article 1: caselaw supports the premise that digital assets are securities and not commodities
Article 2: digital assets have enabled a crypto crime wave of epic proportions
"How tech bros bought America’s most pro-crypto Congress ever", CNBC, November 2024
“Digital assets as the new alternative for institutional investors”, The Economist, August 2024
31
“Crypto goes institutional in 2024”, Global Digital Finance, April 2024
32
“Japan Survey on Digital Asset Investment Trends for Institutional Investors 2024”, Nomura, June 2024
33
“Canada’s investment sector (re)embraces crypto assets in 2023”, KPMG, CAASA, April 2024
29
30
39
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Top Ten List
Top Ten List for 2025 and a scorecard on 2024’s list
Last year’s Outlook contained a top ten list in addition to our prediction of a soft landing in the US. The US soft
landing is still in place; here’s how the list turned out:
Ranking
1
January 1 2024 Prediction
2
The DoJ/FTC win a big antitrust case
3
President Biden withdraws between Super Tuesday and the
election, citing health reasons
4
5
6
Outcome assessment
Despite all the hand-wringing over risks to reserve currency status
and BRIC efforts to develop a competitive reserve currency, the US Dollar trade weighted index rose ~7% in 2024
dollar remains stable, within a +/- 1 std deviation band of 7%
Judge ruled Google monopolized online search through its
partnership with Apple. In November, the DoJ asked a federal
judge to force Google to sell its Chrome browser and impose
restrictions on how Google uses AI and Android mobile OS
Biden withdrew on July 21st 2024
After Musk's cybercab presentation which lacked technical details
and which glossed over regulatory issues, Tesla share price fell
9%; LiDAR basket down 13% in 2024, down 88% from peak levels;
Little to no progress on self driving cars in the US
GM gives up on its $9 bn investment in Cruise; modest progress at
Waymo but still a tiny footprint (see below)
Broadly syndicated leveraged loan losses rise above private credit Leveraged loan and private credit default rates are similar but
losses for the first time
private credit stress is clearly growing (see next page)
Dollarization has not been attempted but I underestimated
Argentine dollarization will fail if implemented
prospects for Argentina macro stabilization (see next page)
7
Russian invasion of Ukraine drags on with no ceasefire in 2024
No ceasefire yet as Russia intensifies ground assault; Zelensky
argues that ceasefire would weaken Ukraine negotiating position
8
US regional bank stocks will do well in 2024 with stable or rising
price to book values
US Regional Bank Index returned ~10% in 2024, price to book ratio
stable at 1.2x despite ongoing commercial real estate pressures
9
10
Major US cities will face electricity outages and/or natural gas
outages due to outdated grid infastructure
Researchers will complete work on an inhaled COVID vaccine
that will reduce transmission
The only major power outages were due to hurricanes
Nasal vaccine approved in India; Clinical trials continue in the US
Source: JPMAM, 2024
Additional details
#4: Self-driving/autonomous cars in the US
A few years ago, Elon Musk projected 1 million Tesla robotaxis by 2020, GM projected mass production of fully
autonomous vehicles by 2019, Lyft said half its rides would be self-driving by 2021, Ford mentioned 2021 as a
mass production date and there were similarly optimistic projections from VW, Nissan, Toyota, Daimler and
Google. Even Jensen Huang at NVIDIA predicted in 2017 that by 2021, autonomous cars would be widely
available. Update: there are a few thousand autonomous cars being road-tested in the US and that’s about it.
What about Tesla? The independent reviewer AMCI evaluated Tesla’s Full Self Driving builds across city, rural,
mountain and interstate environments last fall. AMCI described the FSD program as impressive for a camerabased system but noted that human intervention was still needed every 13 miles. In these moments, split
second reactions are required to avoid accidents such as running red lights and crossing into oncoming traffic.
From AMCI: "Whether it's a lack of computing power, an issue with buffering as the car gets behind on
calculations or some small detail of surrounding assessment, it's impossible to know. These failures are the most
insidious. But there are also continuous failures of simple programming inadequacy, such as only starting lane
changes toward a freeway exit a scant tenth of a mile before the exit itself, that handicaps the system and casts
doubt on the overall quality of its base programming” 34.
34
“Tesla Full Self Driving requires human intervention every 13 miles”, ARS Technica, September 25, 2024
40
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Top Ten List
The company in the lead autonomous vehicle position in the US is Google’s Waymo. The company has 700
cars on the road in San Francisco, Los Angeles and Phoenix. It plans to expand to 25 cities in 2025 and at that
point, we may see a proof statement that Waymo can scale in places without consistently sunny weather. But
for now, the company completes just 100,000 rides per week compared to 239 million rides per week for Uber
in Q3 2024. Google has some algorithm fixes to focus on as well: last August, YouTube and Tik Tok were buzzing
with a video of a Waymo vehicle driving the wrong way in Tempe Arizona into oncoming traffic 35.
#5: Private credit and broadly syndicated leverage loans
Private credit and leverage loan default rates are still low, around 2% for both. However:
•
Private credit default rates are higher when including distressed debt exchanges [Fitch: 5%]
•
The payment in kind (PIK) share of BDC income has doubled since 2019 from 4% to 9%, and they’re even
higher for the major BDCs. As we discussed in the Holiday piece in December, the PIK share of net income
(after netting out cash expenses) is even higher, ranging from 10%-35% for the major BDCs
•
Data from KBRA and Morgan Stanley show modestly lower recoveries for private credit defaults than for
leveraged loan defaults, which contradicts my (possibly mistaken) belief that covenant protections would
result in the opposite outcome
#6: Argentina dollarization
Argentina has for now abandoned dollar convertibility as a goal. In retrospect, it might have been used by Milei
as a symbol for political purposes. Instead, the country is now aiming for a stable bimonetary system of pesos
and dollars, one that may eventually allow the Argentine government to regain access to capital markets, and
for the country to remove foreign exchange controls. In the meantime, there's a lot more good news than bad
and I underestimated the potential for Argentine macroeconomic stability:
•
Milei retains high popularity despite a painful early 2024 fiscal adjustment and few allies in Congress
•
Projected positive fiscal balance, declining inflation and rallying domestic equity markets
•
Declining demand for capital flight inferred from parallel exchange rate markets
•
Declining spreads on dollar-denominated sovereign debt, rising dollar deposits in the banking system
•
Argentine corporates accessing global bond markets at single digit yields
•
Argentine banks are now financing the private sector again after years of just financing the public sector
Argentina CPI
Percent
Percent
25%
20%
300%
m/m % change
250%
y/y % change
200%
15%
150%
10%
100%
5%
0%
2019
50%
2020
2021
2022
2023
Source: Bloomberg, JPMAM, November 30, 2024
2024
0%
2025
Argentina fiscal balance
Percent of GDP, seasonally adjusted
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
2019
2020
2021
2022
2023
Source: Bloomberg, JPMAM, September 30, 2024
2024
2025
You can watch the video here. Another video showed a Waymo picking a passenger up at the wrong spot,
dropping off at the wrong spot, stopping at a green light and refusing to unlock the doors when asked
35
41
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Top Ten List
My Top Ten List for 2025:
[1] You’re Fired! At least three Senate-confirmed Trump-appointed members of the Cabinet plus the following
five Agencies (EPA, CIA, DNI, FBI, NIH) will be gone by the end of the year
[2] Renewables will underperform traditional energy again in 2025, in part due to their lower profitability
Renewables vs traditional energy: annual outperformance
Renewables composite return minus traditional energy return
200%
Renewables composite
(equal weighted):
NASDAQ Clean Edge
Wilderhill Clean Energy
FTSE Renew/Alt Energy
S&P Global Clean Energy
MAC Global Solar
175%
150%
125%
100%
75%
Traditional:
MSCI World Energy Index
(oil, gas and pipelines)
50%
25%
0%
-25%
-50%
-75%
2016 2017 2018 2019 2020 2021
Source: Bloomberg, JPMAM, December 27, 2024
2022
2023
2024
-10%
-15%
Clean
energy
Oil & gas
Healthcare
Technology/Software
Telecom
Internet of Things Index
MSCI Fintech Index
MSCI Robotics Index
NASDAQ Cybersecurity Index
Telecom
Wireless
Electronic components
Electronic equipment
Communications equipment
Tech hardware
Systems software
Internet infrastructure
Application software
IT consulting
Data processing
Healthcare equipment
Healthcare supplies
Life sciences tools
Large cap pharma
Biotech
Integrated oil & gas
Oil & gas exploration
Oil & gas refining
0%
-5%
Oil & gas equipment
5%
Pipelines
10%
Bloomberg Clean Energy
15%
S&P Global Clean Energy
20%
FTSE Clean Energy
25%
Wilderhill Clean Energy
30%
NASDAQ Clean Energy
35%
MAC Solar Index
40%
MSCI Cybersecurity Index
Operating margins by sector and index
Cyber,
Robotics and
Fintech
-20%
Source: Bloomberg, JPMAM, December 17, 2024
[3] Japan outperforms China. MSCI Japan will outperform MSCI China despite Japan’s higher P/E multiple.
There’s plenty of room for Japan to equitize further and Japanese buybacks are accelerating
Japanese announced share buybacks
Yen, trillions
14
12
Room for Japan to "equitize"
10
US
8
Japan
10yr dividend payout ratio (non-financial)
46.7%
30.0%
6
Cash % market cap
4.6%
71.9%
4
Corporate buybacks % market cap
1.5%
1.0%
Share of companies trading below book value
4.0%
45.2%
Household equity allocations
40.0%
13.0%
Public plan equity allocations
47.0%
25.0%
2
0
'01 '03 '05 '07 '09 '11 '13 '15 '17 '19 '21
Source: JP Morgan 2025 Global Equity Outlook, November 2024
'23
'25
Source: Bloomberg, NASRA, Reuters, P&I Online, JPMAM, December 2024
42
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Top Ten List
[4] Weight loss drug discontinuation rates will hurt certain GLP stocks. As per a recent study, 50% to 70% of
Ozempic, Wegovy and Rybelsus users discontinued use within one year. Reasons for discontinuation include
gastrointestinal distress, injection frequency, less weight loss for oral versions and a preference for other GLP
brands. These trends are showing up in analyst revenue projections which are flat-lining before the end of the
decade. Novo Nordisk will end 2025 below current consensus analyst price targets of $127 per share, even if
the CMS covers GLP costs for a larger pool of Medicare/Medicaid patients as discussed earlier
Novo Nordisk GLP-1 discontinuation
Consensus analyst sales forecasts for Novo GLP drugs
1.0
$25
Probability of therapy persistence
US$, billions
Wegovy
0.9
$20
0.8
0.7
$15
0.6
Ozempic
0.5
0.4
Wegovy
0.3
Rybelsus
0.2
0
30
60
90
Ozempic
$10
Rybelsus
$5
120 150 180 210 240 270 300 330 360
$0
2022
2023
2024
2025
2026
2027
Source: "Real-world persistence & adherence to GLP-1s", Gleason et al, 2024 Source: Empirical Research, September 2024
Days since start of treatment
2028
2029
2030
[5] No nuclear small modular reactor will start construction in the US in 2025. Despite a 6.5 GW pipeline of
small modular nuclear reactors in pre-development or early development stages in the US, not a single one will
actually begin construction in 2025
[6] DOGE cost cuts will be $150 billion or less. Other than rolling back Biden Executive Actions, concrete
annualized DOGE cost savings will amount to less than $150 billion per year by the end of 2025, which would be
2% of FY 2024 Federal government spending
[7] Hedge funds will continue to outperform stock-bond benchmarks. More than 80% of diversified hedge
fund portfolios with 20 randomized funds outperformed a stock-bond benchmark, using HFR performance data
from January 2018 to September 2023. We walked through the details in our 2023 Biannual Alternative
Investment Report 36. By the end of 2025 when we update the analysis, at least 75% of randomized hedge fund
composites with 20 funds will again outperform their respective stock-bond benchmarks
20-fund composites vs benchmarks [HFR]
Annualized excess return vs T-bills since Jan 2018
10%
9%
80/20
8%
70/30
7%
60/40
6%
50/50
5%
40/60
4%
30/70
3%
2%
Hedge fund composites, 20 HF each
Benchmarks (S&P 500 / Bloomberg Aggregate Bond Index)
1%
0%
4%
6%
8%
10%
12%
14%
16%
18%
Annualized excess return volatility
Source: JPMAM, HFR, September 2023
36
“It’s Mostly a Paper Moon”, Biannual Eye on the Market Alternative Investment Report, December 5, 2023
43
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
Top Ten List
[8] Housing inflation will fall below 4%. More single family and multifamily housing under construction will be
completed, driving down CPI real estate inflation below 4% by the end of 2025
Housing supply under construction
Shelter inflation
1.6%
12%
11%
Peaked at 21%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1954
1964
1974
1984
1994
2004
Source: Bloomberg, JPMAM, November 30, 2024
Percent, y/y change
Percent of owner occupied housing stock
1.4%
1.2%
Multi-family
1.0%
0.8%
Single-family
0.6%
0.4%
0.2%
2000
2003
2006
2009
2012
2015
2018
2021
2024
Source: Bloomberg, US Census, JPMAM, October 2024
2014
2024
[9] Blue state out-migration will continue 37. The table below shows the 20 largest interstate migrations from
2018 to the fall of 2024. For example, the largest migration was 148,000 people moving from NY to FL. A key
summary statistic: 70% of all movers relocated from blue to either red or purple states, with purple defined as
those states with +/- 3% margins in either the 2020 or 2024 Presidential election. In 2025, 70% or more of all
movers will again move from blue to either red or purple states. According to the Brennan Center, these
population shifts will impact the 2030 Census and the Electoral map: in 2032 if a Democrat won the same states
Harris won in 2024, it would equate to 12 fewer electoral college votes.
Top 20 interstate migrations
January 2018 - October 2024, colors=state political affiliation
Rank
Departure state
Destination state
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
NY
NY
CA
CA
CA
NJ
IL
NY
CA
NY
CA
CA
NY
CA
IL
CA
CA
NY
FL
CA
FL
NJ
TX
AZ
NV
FL
FL
PA
WA
CT
OR
FL
NC
ID
TX
TN
CO
TX
NC
NC
148
147
110
75
74
58
53
50
49
47
43
43
40
35
33
33
29
27
25
24
Migrations from blue to red & purple states as a % of total
70%
Net m ove count, thousands
Source: Chase, JPMAM, October 2024
[10] The Trump Administration will launch a targeted military action against drug cartels in Mexico. Fentanyl
seizures by Border Patrol have risen from 4,800 pounds in 2020 to 27,000 pounds in 2023 38. According to the
DEA, most fentanyl trafficked by Mexican cartels is mass-produced at factories in Mexico with chemicals sourced
largely from China. In 2023, 20 House Republicans drafted a bill allowing for authorization for use of military
force against cartels; the idea has since been supported by Governor Ron DeSantis, former Governor Nikki Haley,
Vivek Ramaswamy, Senator Tim Scott and Trump Advisor Jason Miller. If it happened, it would be the first use
of US military force in Mexico (unauthorized by the Mexican government) in over 100 years
Interstate taxpayer migration is available from the IRS but with a three-year lag. We use Chase Data Science
estimated migration rates which are derived from zip codes on credit card customers filing change of address
forms. This approach has yielded results that are almost identical to IRS data when back-tested
38
“Illicit Fentanyl and Drug Smuggling at the US-Mexico Border”, National Immigration Forum, October 2023
37
44
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
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EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • January 1, 2025
2025 OUTLOOK
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