JPMorgan remains constructive on equities heading towards the end of the year, although the bank expects further gains to be driven by shifts between market segments rather than a broad-based surge in stocks.
“In equities, we stay constructive into year-end, expecting a grind higher with rotation rather than a broad melt-up move,” strategist Fabio Bassi wrote in a note to clients.
The bank pointed to the recovery in semiconductor stocks as evidence of a tactical improvement in risk appetite. With Federal Reserve patience helping to keep volatility contained, JPMorgan expects investor positioning and differences in performance across market segments to shape the next phase of the equity rally.
Quality Growth and hyperscalers remain favoured
JPMorgan continues to favour Quality Growth stocks and hyperscalers, while also seeing opportunities in semiconductors following their recent repricing.
The bank said a Goldilocks environment, in which genuine disinflation allows the Fed to remain on hold, could create conditions for equity gains to broaden beyond current market leaders.
At the same time, developed-market bond curves have steepened following a sharp selloff at the long end. JPMorgan attributed the move partly to supply-related “crowding out,” as heavy capital expenditure by hyperscalers competes for capital alongside sovereign debt issuance.
Improving confidence in the ability of artificial intelligence investments to generate returns has also contributed to higher real expected returns on investment, according to the bank.
Higher long-term yields not necessarily a risk-off signal
Despite the increase in long-term borrowing costs, JPMorgan does not interpret recent bond-market moves as evidence that investors are becoming concerned about a monetary policy mistake.
“Higher long-end yields and steeper curves may reflect higher demand for capital and investment opportunities more than policy-error fears,” the bank wrote.
Under JPMorgan’s base case, which assumes only a modest additional increase in term premiums, the rise in longer-dated yields is not expected to trigger a broad risk-off move across financial markets.
Treasury buybacks highlight focus on long-term yields
JPMorgan also highlighted the US Treasury’s increased buybacks of 10-year and 30-year securities, saying the move indicated discomfort with the rise in longer-term yields.
Meanwhile, the bank does not expect the Jackson Hole symposium to provide a definitive answer to the continuing debate over the Federal Reserve’s reaction function.
Overall, JPMorgan’s outlook remains supportive for equities, but the bank expects market leadership to continue shifting as investors respond to valuations, interest rates and evolving expectations around AI-related investment.