MW Never mind tariffs and tantrums, 'the dual equity pain trade' means new highs for stocks

By Jamie Chisholm

Big investors find themselves underweight big tech as leadership narrows again, says JPMorgan

The spat that erupted Thursday between the world's most powerful man and its richest had investors mainly reaching for the popcorn rather than the sell button.

Yes, Tesla lost nearly $200 billion of market value, but the S&P 500 SPX closed only 0.5% lower. The Wall Street barometer still sits just 3.3% off its record high of February. It has bounced 19.2% off the April low, as concerns about the impact of the Trump administration's trade war have eased.

Buy-the-dip investors try to look through the tariffs and tantrums.

And according to a team of strategists at JPMorgan led by Dubravko Lakos-Bujas, the "path of least resistance is to new highs."

In a note published on Thursday, the team observed that the S&P 500's trundle back towards the 6,000 level has in particular been powered by a better-than-expected first-quarter earnings season.

"Corporates not only delivered healthy pre-Liberation Day earnings growth of 12%, but more importantly, guidance was better than expected at a time when the implied aggregate tariff rate was [approximately] 20%," they write.

Furthermore, investors appear re-energized about the AI trade, with little sign of an end to big tech's capital spending boom.

The main risk to this supportive backdrop is a significant economic slowdown in the second half of the year, according to the bank. "[A]ggressive tariff related front-loading, lagged effects of new policies (i.e., tariffs, immigration, DOGE), and divergence in soft vs. hard data could be a downside risk to growth," they say.

Indeed, the JPMorgan team note that their business cycle indicator, which leads actual earnings per share growth by 2 to 3 quarters, has been flagging a potential slowdown risk for the last three months.

And it will be a problem for stocks if such a contraction in activity occurs at a time when the market is much more richly valued than it was just several weeks ago, they say.

Still, there's a silver lining for this scenario as it may cause the Federal Reserve to ease policy quicker, and with this "the market could look through the weakness (i.e. pricing in a Goldilocks backdrop) with lagging segments of the market (cyclicals, small caps) reviving, at least temporarily," says Lakos-Bujas and his team.

In the shorter term, however, the bank reckons there's a "dual equity pain trade" that will help continue the bull run.

"First, investors are not positioned for the market to squeeze higher (i.e., institutional investors who sold to corporate and retail buyers during the panic sell-off in April are chasing the market higher)," they write.

Second, JPMorgan thinks that most investors are not positioned for stock market leadership to narrow again. The consensus theme so far in 2025 has been about diversifying away from U.S. winners, notably mega tech and quality growth stocks and into erstwhile global underperformers such as Europe and emerging markets.

There may thus be something of a scramble to buy back into some of the U.S. exceptionalism plays. "Given the world remains in short supply of high-quality assets (such as the largest 20 U.S. companies, U.S. credit) with ample liquidity, we wonder how much valuation and elevated ownership of U.S. assets will actually matter when U.S. policy and macro volatility subsides," says JPMorgan.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is up, while oil prices (CL.1) fall and gold (GC00) is trading around $3,354 an ounce.

   Key asset performance                                                Last       5d     1m     YTD      1y 
   S&P 500                                                              5939.3     0.47%  4.94%  0.98%    11.08% 
   Nasdaq Composite                                                     19,298.45  0.97%  7.64%  -0.06%   12.64% 
   10-year Treasury                                                     4.378      -3.00  -1.10  -19.80   -6.10 
   Gold                                                                 3382.6     2.10%  1.61%  28.16%   46.36% 
   Oil                                                                  63         3.41%  4.53%  -12.34%  -16.74% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

The May nonfarm payrolls report is published at 8:30 a.m. Eastern. Economists forecast a net 125,000 jobs were added, down from 177,000 in April. The unemployment rate is expected to remain at 4.2%, while month-on-month hourly wages will grow 0.3% against 0.2% in April.

Tesla shares $(TSLA)$ are rallying 5%, after tumbling 14.3% on Thursday, amid hopes of a rapprochement between Donald Trump and Elon Musk.

Lululemon athletica shares $(LULU)$ are diving more than 20% after the athleisure clothing maker cut its full-year profit outlook, as U.S. tariffs on imports continue to spook consumers.

Broadcom shares $(AVGO)$ are down around 4% after the semiconductor and software company's outlook beat forecasts but investors took profits after a sharp rally.

DocuSign shares $(DOCU)$ are plunging 18% after the e-signature company trimmed its outlook for billings.

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The chart

Some recent weakness in the bond markets reflects concerns the widening U.S. fiscal deficit will boost supply of Treasurys. But perspective is needed. Jim Paulsen of the Paulsen Perspectives blog notes that the market value of bonds as a percentage of the market value of stocks is near multi-decade lows. "[O]ne could argue there is currently a 'shortage' of bonds," says Paulsen.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   PLTR    Palantir Technologies 
   AVGO    Broadcom 
   AAPL    Apple 
   AMZN    Amazon.com 
   AMD     Advanced Micro Devices 
   TSM     Taiwan Semiconductor Manufacturing 
   EYEN    Eyenovia 

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June 06, 2025 06:32 ET (10:32 GMT)

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