2026 could be a year with strong fundamentals and sour sentiment: JPMorgan's Meera Pandit

Summary

• Market tension between sour sentiment from geopolitical headlines and strong fundamentals, with S&P 500 earnings estimates revised up from 15% to 17% growth.
• Earnings growth could be stronger than the past two years of double-digit growth, despite potential revisions due to higher energy and input costs.
• Stock-picking opportunities are favorable: 58% of S&P 500 stocks outperforming the index, the highest share since 2022 and 2010, aided by relatively low correlations.
• Within worst-performing sectors like financials (down this year), 42% of stocks still outperform the index, highlighting selective opportunities beneath the surface.
• Energy sector was the only sector up last month due to high prices, but persistence could challenge markets; any bounce might be premature if oil prices don't decline.
• Longer-term secular themes in industrials, materials, and utilities are driven by AI infrastructure investment, shifting from capital spenders to recipients.
• AI trade evolution: tech has shifted from capital-light to capital-heavy, with opportunities in value-oriented sectors for infrastructure inputs.
• Tech valuations have moderated: MAG-7 down from 29x to 23x, with dropping correlations allowing selective opportunities within the tech layer.
• International opportunities in Korea, Taiwan, and Latin America are anchored by strong earnings growth from AI supply chain participation, not just dollar or valuation factors.
• Historical analogy to 2022 suggests energy challenges may eventually relieve, potentially setting up periods of strong returns despite short-term volatility.
• Outlook for 2026 could be a year with very strong fundamentals paired with very sour sentiment, creating a nuanced investment environment.