The market rally has more upside ahead, says JPMorgan's Elyse Ausenbaugh

Key Concepts

• Market Momentum: Continued upward trend in the stock market.
• Macro Backdrop: The overall economic environment influencing investment decisions.
• AI Investment: Capital expenditure and resources allocated to artificial intelligence development and infrastructure.
• Fed Rate Cutting Cycle: A period where the Federal Reserve reduces interest rates to stimulate economic growth.
• Corporate Profit Margins: The percentage of revenue remaining after deducting the cost of goods sold and operating expenses.
• Labor Market: The supply and demand for labor, including employment rates, hiring trends, and layoffs.
• Government Shutdown: A situation where the government temporarily ceases operations due to a failure to pass funding legislation.
• Real Wage Growth: The increase in wages adjusted for inflation, reflecting the actual purchasing power of earnings.
• Wealth Effects: The impact of changes in asset values (e.g., stock market gains) on consumer spending and economic activity.
• GDP Growth: The rate at which a country's gross domestic product (GDP) increases or decreases over a period of time.

Market Outlook and Momentum

• Elise Ozumba, Head of Investment Strategy at JP Morgan Wealth Management, believes the market momentum will continue into 2026.
• The S&P 500 has risen by over 7% and the Nasdaq by over 11% in the third quarter.
• Ozumba cites a challenging 2025 but expects improvement in 2026 due to powerful tailwinds like AI investment.

Drivers of Market Performance

• The current market strength is attributed to a mix of factors, including the anticipation of a Fed rate-cutting cycle and strong corporate performance.
• Corporate profit margins remain high, supporting valuation and fueling earnings growth.
• Investment in infrastructure to support AI is filtering through various sectors.
• Uncertainty related to tariff policy is dissipating, contributing to a more stable economic outlook.

Labor Market Analysis

• The labor market is described as "bending but not breaking," with a substantial slowdown in hiring.
• The current pace of hiring is the slowest since the global financial crisis, excluding the pandemic era.
• Ozumba does not expect a significant rise in layoffs due to supported corporate profit margins.
• The unemployment rate may tick slightly higher through year-end, but a complete collapse of the labor market is not anticipated.

Government Shutdown Impact

• Multiple government shutdowns have occurred since the early 1980s, varying in length.
• Historically, the length of shutdowns has not significantly impacted market performance; stocks tend to rise, and Treasury yields modestly decline.
• The primary concern during a shutdown is the absence of economic data, such as the payrolls report, which could create confusion in the macro picture.

Economic Data and Alternatives

• If a government shutdown occurs and key economic data is unavailable, alternative sources like JOLTS data, ADP, and private data sources can be used.
• JP Morgan Wealth Management has models to assess trends using these alternative data sources.

Consumer Spending and AI Investment

• The consumer is faring "okay," with slowing but positive real wage growth supporting spending, contingent on continued employment.
• Wealth effects from the stock market rally are also contributing to consumer resilience.
• AI investment is playing a significant role in driving economic expansion, alongside consumer spending.

Conclusion

Elise Ozumba from JP Morgan Wealth Management expresses optimism about the market's continued momentum, driven by factors such as AI investment, strong corporate profit margins, and the anticipation of a Fed rate-cutting cycle. While the labor market is slowing, a complete collapse is not expected. A potential government shutdown poses a risk due to the absence of key economic data, but alternative data sources can help assess trends. Overall, the economy is being supported by both consumer spending and significant investment in technology, particularly AI.