Markets have been on a tear in recent months, with the S&P 500 led higher by a combination of cyclical and value-oriented sectors. Beneath the surface, this equity market rally is seemingly being driven by a handful of factors – Fed easing, ebbing fears of a recession, and what can be generally characterized as a trade truce. It is unclear how long these factors will remain in play, as it seems difficult for all three to coexist. Fed easing was driven by escalating trade tensions and concerns about growth earlier this year – while the bar for a shift in Fed policy is high, a sustained trade truce against a backdrop of moderate growth could potentially lead them to change their tune.

One other driver of this rally has been an increase in liquidity. M2 money supply growth – which includes cash and checking deposits, as well as savings deposits, money market funds, and other time deposits – has been steadily accelerating since the end of the summer. Equity markets are forward looking, and pricing in the acceleration in economic and profit growth tend to accompany an expanding money supply. Furthermore, an expanding money supply often times coincides with easier central bank policy, making equities an increasingly attractive investment relative to bonds.

The question for investors, however, is how long this rally will persist. After a year where the majority of equity market returns were driven by multiple expansions, rather than earnings, it seems reasonable to expect this dynamic to shift back towards an earnings-driven market in the coming year. That said, consensus estimates for 2020 earnings growth remain robust at nearly 10%, but it is unclear whether this will actually come to fruition. Our own models point to earnings growth in the mid-single digits – this should still allow equities to trend higher over the coming year, but we are increasingly focused on total yield (dividends + buybacks) as we evaluate stock market opportunities.


Stocks have risen as money supply has expanded M2 and S&P 500, year-over-year % change



Written by JP Morgan Asset management

Sources: FactSet, Federal Reserve, Standard & Poor’s, J.P. Morgan Asset Management.
Data are as of December 19, 2019.

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