U.S. Inching Closer to Stagflation

While news of an interim trade deal being hashed out between the U.S. and China somewhat buoyed the U.S. market, the recently unfolding flare-up in the Middle East between Israel and Iran has raised concerns over shipping routes and oil supply dynamics and could potentially cancel it out. During JPMorgan’s Investor Day event on the 19th of May, CEO Jamie Dimon warned that the chances of the U.S. entering into stagflation – a period where economic stagnation is coupled with growing inflation – is likely double than what is being estimated by the rest of the global banks. He also remarked that the markets were showing an “extraordinary amount of complacency” in the face of the economic threats from President Trump’s tariff war.

Notes from JPMorgan’s research desk released early in June drove home this assertion further.

Fundamentals vs Technicals

Given the market’s meteoric rise in 2024, institutional asset managers had tended to increase positioning in in the broad market – such as the S&P 500 – over specific sectors and stocks. However, JPMorgan’s strategists noted that through most of Q1 and Q2 of this year, this tendency has softened and retreated back to positions last seen in November 2024.

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Source: JPMorgan; chart redesign by Leverage Shares

The team led by Mislav Matejka stated that positioning wasn’t cautious anymore and that short covering has grown significant – meaning that “systematic rerisking” via exposure to specific sectors and tickers have been increasing over being exposed to the broad market as a “safe haven”.

The implications of this lies especially heavy on U.S. households, who are now more exposed to stocks – either via stocks and ETFs held in the likes of IRAs (“Individual Retirement Account”; tax-advantaged savings account held for retirement savings) or via direct retail trading accounts – than they have been in more than 75 years.

Source: JPMorgan; chart redesign by Leverage Shares

However, this trend could also be interpreted in a number of ways: traditionally, home equity has tended to be a very significant component of the average U.S. household’s asset mix. While home sales have seen some decline, a growing trend within the U.S. is declining homeownership among younger generations on the back of high home prices. With savings not flowing through to mortgages, they are instead redirected to discretionary spending and (of course) stock investments – leading to a rising number of retail investors with relatively modest account sizes and disparate convictions.

JPMorgan’s strategists cautioned that retail investor positioning is higher than the peak seen in 2000 – a period that witnessed the bursting of the tech bubble and a sometimes-overnight evaporation of investor fortunes. In light of this, the bank has been cautioning its clients to not be heavily invested in the “growth” style of investing for over almost a year now. They stated, “post the recent bounce, we think a softer leg is in store next, which could resemble a bit of a stagflationary episode.”

An element of the con conviction is also evident in the investment patterns of prominent investors. Case in point: Michael Burry (of “The Big Short” fame) whose hedge fund Scion Asset Management had enacted a massive reversal of course as of the end of Q1 2025.

Source: Leverage Shares analysis

From being long on healthcare and energy – which could be considered “recession hedges” as well as value style investments – along with significant convictions in Chinese tech names, Scion’s 13F filing with the U.S. Securities and Exchange Commission now reveals that Mr. Burry is now essentially shorting Chinese tech as well as Nvidia. In a portfolio that had grown in notional value in Q1 2025 by 157% relative to Q4 2024, the only position that he was consistently long on was Estee Lauder – a veritable mainstay in discretionary spending.

Future equity positioning, JPMorgan argues, should be more driven by fundamental outcomes, rather than technicals.

In Conclusion

While May was the S&P 500’s best month since May 2023, concerns over global trade and the U.S. budget deficit weighed heavy on overall performance for the year, essentially leaving returns on the index flat for the year so far.

Source: Bloomberg News

This becomes especially apparent relative to comparables in the Western Hemisphere: broad European indices have by far outperformed the U.S. broad market after a momentary drop in the wake of tariff announcements. JPMorgan has been highlighting their preference for international stocks over the U.S., where it deems valuations to have been stretched.

All in all, now is probably the best time to examine the fundamental validity of mid- to long-term outlooks and consider unlocking the potential of tactical strategies. Professional investors in Europe can consider a wide range of Exchange-Traded Products (ETPs) to capitalize on this, such as the 3X Long Germany 40 ETP (DAX3), the 5X Short S&P 500 ETP (SPYS), the mirror opposites in terms of directionality such as the 3X Short Germany 40 ETP (DAXS) and the 5X Long S&P 500 ETP (SP5Y), as well as a host of other instruments that can be found here.