The revenues sourced within the region become more important when you consider that, for the first time in a long time, Europe is becoming a domestic growth story. Germany’s €500 billion fiscal stimulus package is significant, exceeding 1% of GDP; for perspective, that’s larger than the U.S. fiscal response amid the COVID-19 pandemic on a relative GDP basis. Our estimates suggest the package could lead to an annualized GDP increase of 0.6%–0.8% for Germany over the next three years, spilling over to the European region and boosting growth by 0.4%–0.5% per year during that period.

We think the boost to growth could lead to sustainably higher multiples for European equities toward 14.5x forward earnings from ~14x now, which would still represent a ~30% discount relative to current U.S. valuations. What’s more, as we focus on increasing income in portfolios, European equities offer a dividend yield ~200 basis points above the S&P 500.

The kicker comes in the form of a historically ignored factor for U.S. investors: foreign exchange return. While we do not foresee the dollar losing its reserve currency status soon (nearly 90% of all FX trades involve the USD), capital will likely continue its shift at the margin out of dollars and into other global markets amid downside USD risks. While the Euro Stoxx 50 has returned ~+4.5% year-to-date in local currency terms, the euro’s appreciation against the dollar has led to gains in the mid-double digits for unhedged dollar-based investors.

2. Municipal bonds for tax-sensitive U.S. buyers: The Bloomberg Municipal AAA yield curve has steepened significantly, with the 30-year yield increasing close to 70 basis points year-to-date, reaching levels not seen since the global financial crisis. This steepening, along with the absolute yield on the Bloomberg Municipal Bond Index, presents a compelling investment case.

It’s not just the absolute yield, but also the relative yield versus Treasuries (Muni bond yield/Treasury yield of similar tenor, where a higher ratio is better for munis) that stands out as attractive. Both the 2- and 5-year parts of the curve are trading cheaply on 1-, 5- and 10-year averages, while the 10- and 30-year parts are attractive relative to 1- and 5-year averages.

What’s driving the cheapening in municipal bonds is market concerns over their tax-exempt status.

Municipal bonds are debt securities issued by states, cities or other local government entities to fund public projects. The interest income from these bonds is typically exempt from federal income tax (the federal government doesn’t tax municipalities, and vice versa). This tax exemption makes municipal bonds attractive for individuals in higher tax brackets.

The U.S. government is seeking ways to limit its deficit while passing an extension of the Tax Cuts and Jobs Act. The House of Representatives voted to adopt the Senate-amended fiscal year (FY) 2025 concurrent budget resolution, allowing for legislation to add $5.8 trillion to deficits through FY 2034. Some chatter in Washington has floated taxing municipal bond interest to raise government revenues. Given that the government only misses out on ~$30 billion per year in revenue by not taxing muni bonds, changing that policy wouldn’t make a dent. Our base case remains that municipal bond interest will remain exempt from federal taxes, and will continue to be a ballast and diversifier in portfolios.

Secondaries are transactions in which investors buy and sell existing stakes in private equity or other alternative investment funds. They can be LP-led (a limited partner sells its commitment in a fund to a secondary buyer) or GP-led (a general partner sells one or more portfolio companies to another vehicle). Secondaries generally offer investors portfolio diversification by allowing them to acquire interests in existing funds across different vintage years and managers, mitigating risks associated with single-fund investments. Additionally, they help bypass the early-stage “J-Curve” effect, enabling investors to potentially see returns sooner by investing in more mature funds. These transactions also often come at a discount to the NAV. These factors combined present the opportunity for secondaries to generate attractive risk-adjusted returns.

For more details on how these options may fit in your portfolio, reach out to your J.P. Morgan team.