Why does JPMorgan expect bond yields to stabilise?
JPMorgan strategists believe the increase in government bond yields this year may be approaching its limit, potentially reducing pressure on global equity markets during the final months of 2026.
In a research note, strategists led by Mislav Matejka reiterated their assessment that the recent rise in yields had become extended, with bond markets showing signs of oversold conditions.
The team said it had identified these developments two weeks earlier, when the pace of the bond market selloff suggested that further increases in yields might become more limited.
JPMorgan’s fixed income strategists have year-end targets for longer-dated government bond yields across major markets that are either unchanged from or below current levels.
The bank’s outlook therefore anticipates a period of greater stability in bond markets rather than a continuation of the recent increase in borrowing costs.
How have higher bond yields affected stock market valuations?
Rising bond yields have placed pressure on equity valuations by increasing the returns available from fixed income investments and raising the cost of capital for companies.
During the most pronounced phase of the recent yield increase, forward price-to-earnings ratios declined by approximately three points for both the MSCI All-Country World Equity Index and the S&P 500.
European equity valuations experienced a smaller adjustment, with forward earnings multiples declining by approximately two points.
JPMorgan believes that stabilising yields could reduce the pressure for further declines in valuation multiples.
“The multiple compression might not need to continue,” the strategists wrote.
The bank also suggested that lower volatility in bond markets could improve perceptions of economic sustainability, reduce pressure on household finances and ease concerns about the funding requirements of artificial intelligence infrastructure.
What role do Federal Reserve interest rate expectations play?
JPMorgan believes changes in expectations for US monetary policy have already accounted for most of this year’s increase in Treasury yields.
According to the strategists, movements in federal funds futures largely explain the rise in the yield on the benchmark 10-year US Treasury note.
The bank does not expect substantial additional adjustments to Federal Reserve interest rate expectations beyond those already reflected in financial markets.
This assessment suggests that a major source of upward pressure on longer-term borrowing costs may have diminished.
However, future movements in yields will continue to depend on economic data, inflation developments and changes in monetary policy expectations.
Are inflation pressures likely to push bond yields higher?
JPMorgan said inflation expectations remain relatively contained, based on consumer surveys and financial market indicators.
Although recent US inflation readings have exceeded expectations, the bank believes underlying inflation trends have changed less substantially.
In Europe, core inflation trends remain broadly comparable with levels observed before the start of the Iran war, according to the strategists.
In the United States, underlying inflation is approximately 0.3 percentage points higher than before the conflict.
JPMorgan also noted that wage growth and expectations for future wage increases remain subdued.
The bank considers these developments relevant because sustained increases in inflation expectations could lead investors to demand higher yields on government bonds.
Could AI infrastructure borrowing put further pressure on bond markets?
The expansion of artificial intelligence infrastructure has increased borrowing requirements among major technology companies, raising questions about whether corporate debt issuance could compete with government bonds for investor capital.
JPMorgan does not expect AI-related debt issuance to significantly displace demand for sovereign bonds.
The bank also suggested that free cash flow at major hyperscale technology companies could exceed current market projections when financial results become available.
Such an outcome could reduce concerns about the amount of external financing required to support AI investment.
Nevertheless, the scale and timing of infrastructure spending remain important considerations for investors assessing corporate borrowing and equity valuations.
Does JPMorgan see a risk of financial contagion from France?
JPMorgan identified France as an area of continuing concern but said it does not believe investors should position for a broader European sovereign debt crisis.
The strategists cited several differences between current financial conditions and those experienced during the eurozone debt crisis of 2010–2012.
These include the European Central Bank’s available policy instruments, stronger bank balance sheets and a less concentrated distribution of sovereign bond holdings.
JPMorgan also noted that credit default levels are substantially lower than during the earlier crisis.
The bank believes these factors reduce the likelihood that financial pressures in France would spread extensively across European markets.
However, the strategists continue to regard developments in France as a risk requiring monitoring.
What are third-quarter earnings indicating about equity markets?
JPMorgan said the early stages of the third-quarter corporate earnings season have been broadly consistent with its constructive outlook for equities.
Of the 29 US companies and 14 European companies that had reported results at the time of the analysis, the majority delivered results that exceeded expectations and increased their financial guidance.
These outcomes, commonly described as “beat and raise” results, suggest that corporate earnings have provided some support for equity markets despite higher borrowing costs.
However, the sample remains relatively small, and subsequent earnings announcements could alter the overall picture.
JPMorgan also identified oil prices as an important source of uncertainty, particularly given their potential effects on inflation and bond yields.
What is JPMorgan’s outlook for equities through the end of 2026?
JPMorgan believes a stabilisation in bond yields, together with continued corporate earnings growth, could create more favourable conditions for equities during the remainder of the year.
The strategists expect the repricing of Federal Reserve interest rate expectations to be largely complete and see limited evidence of a sustained acceleration in underlying inflation.
They also believe concerns about AI financing and European sovereign debt risks may be manageable under current conditions.
If yields stabilise and earnings remain consistent with expectations, “equities will be able to perform into year-end,” the strategists wrote.
The outlook remains conditional on developments in inflation, energy prices, monetary policy and corporate financial performance.