JPMorgan analysts say earnings momentum should keep driving stock markets higher even as bond yields and inflation risks build. The bank argues the current climate looks nothing like 2022, when central banks had to tighten very significantly, dragging equities down for a full year.
Yields Climb as Inflation Risks Build
Government borrowing costs around the world have spiked to near multi-decade highs in recent days, reflecting worries about price pressures and rising interest rates. The ongoing war in Iran has partly driven these fears, sparking an oil price shock that has pushed up inflation and fueled expectations of imminent central bank tightening.
Federal Reserve Chair Kevin Warsh used hawkish language at the Fed's Jackson Hole symposium, and analysts now expect the U.S. central bank could raise rates as soon as next week. The European Central Bank is seen doing the same on Thursday after its latest policy meeting. Rising inflation expectations, JPMorgan says, are the key risk to watch — but only if they become de-anchored.
Debt Levels Add to the Pressure
The U.S. debt pile has surpassed $40 trillion for the first time, casting doubt on the country's financial stability. Debt as a share of economic output is also at or above 100% across the G7 group of major economies, apart from Germany, according to Reuters data cited in the note.
As a result, many investors continue to fear a material correction in equity markets. Theoretically, a climb in bond yields, which move inversely to debt prices, can make equities in particular less attractive.
Why JPMorgan Still Sees Room to Add
JPMorgan analysts argue any bout of stock weakness could simply make shares cheaper for investors already drawn in by corporate profits on an uptrend. They contrast the setup with 2022, when central banks had to tighten significantly, dragging equities down through the whole year.
The analysts pointed to improving corporate confidence feeding into a recovery in non-tech activity, visible in the upturn in global, ex-China, manufacturing output and U.S. non-tech capital spending. If the solid macroeconomic outlook for the second half keeps gaining traction, they said, that should support further equity upside. According to JPMorgan: "should continue using the dips" in market prices to add to positions.
Source: Investing.com
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