Market is priced for perfection but working well right now, says JPMorgan's Jack Manley

Market Overview - Major indexes are at highs, with favorable atmospheric conditions [1] - Earning season has been strong, with analysts underestimating corporate America's ability to protect margins [2][3] - The market is considered fully valued, with forward price to earnings ratio on the S&P above pre-selloff levels at 22 times and plus [5][6] Rally Analysis - The rally since April lows has been driven primarily by multiple expansions, which is not encouraging [6] - The breadth of the current recovery is more impressive compared to the rally after the October 2022 lows [7] - The Magnificent 7's contribution to returns has decreased from 60% in 2023-2024 to about half this year, indicating a broadening out in price performance and earnings growth [7] Investment Strategy - The current market favors a bottoms-up security selection approach, emphasizing active management to identify winners and losers [9] - Cyclicals have been leading defensive sectors, credit spreads are compressed, gold is above $3,400, and the dollar has been weak, suggesting loose financial conditions [9] Monetary Policy - The economy does not need lower interest rates, and the Fed's control over the economy may be less significant than perceived, although it significantly influences asset prices [10][11][12] - Lower interest rates might provide a short-term boost to housing affordability, but it's not a long-term solution due to underlying issues like insufficient home building [16] Economic Indicators - The top 20% of earners account for 40-60% of spending, benefiting from tax cuts and high stock prices [17] - The housing market faces challenges due to unaffordable homes and dwindling buying activity, linked to high mortgage rates and insufficient home construction [15]