JPMorgan analysts said higher government borrowing costs and inflation remain risks, but continued corporate earnings growth could support equity markets if inflation expectations remain anchored.
Key Investor Takeaways
- JPMorgan expects earnings momentum to remain an important support for equities despite rising bond yields and renewed inflation pressures.
- The analysts said these macroeconomic headwinds could become “more significant” but are unlikely to “derail” the broader market backdrop provided inflation expectations remain anchored.
- Higher oil prices linked to the war in Iran have added to inflation concerns and expectations for tighter monetary policy from major central banks.
- Rising yields may pressure equity valuations, although JPMorgan sees the current environment as different from 2022 because corporate profits are trending higher.
- The outlook remains sensitive to inflation expectations, monetary policy and whether the macroeconomic picture strengthens during the second half.
Why Equity Markets Are in Focus
Government bond yields have moved close to multi-decade highs as investors assess persistent inflation, higher interest rates and mounting sovereign debt.
The oil price shock associated with the war in Iran has intensified those pressures by contributing to inflation and increasing expectations that central banks will tighten monetary policy.
Federal Reserve Chair Kevin Warsh recently used hawkish language at the Jackson Hole symposium, adding to expectations for a possible U.S. rate increase as soon as next week. The European Central Bank is also expected to raise rates following its Thursday policy meeting.
Fiscal conditions represent another source of pressure. U.S. government debt has exceeded $40 trillion for the first time, while debt relative to economic output is at or above 100% across G7 economies other than Germany, according to data cited in the report.
Why This Matters for Investors
Higher bond yields can make equities relatively less attractive by increasing the returns available from fixed-income assets and putting pressure on stock valuations.
JPMorgan nevertheless sees corporate earnings as an important counterweight. The analysts said profits remain “on an uptrend,” meaning periods of equity weakness could result in lower valuations without necessarily changing the underlying earnings trajectory.
“This is in a huge contrast to 2022, where central banks had to tighten very significantly, in turn resulting in a sustained fall in equity prices through that year,” the analysts said.
The bank also pointed to improving corporate confidence and a recovery outside the technology sector, including stronger global manufacturing output excluding China and increased U.S. non-tech capital expenditure and structures activity.
If the stronger macroeconomic outlook for the second half continues to gain traction, JPMorgan said it could support “further equity upside.”
What to Watch Next
Central-bank decisions are the immediate focus, particularly whether the Federal Reserve and European Central Bank deliver the anticipated rate increases and how policymakers characterize the inflation outlook.
Investors can also watch bond yields, oil prices and inflation expectations. A sustained increase in inflation expectations could challenge JPMorgan’s constructive assessment, while continued earnings growth and broader non-tech activity would support its underlying thesis.
JPMorgan’s analysts said investors “should continue using the dips” in market prices “to add” to positions, representing the bank’s view rather than investment advice.