JPMorgan: Rising Yields Unlikely to Derail Equities as Earnings Momentum Holds

Upward earnings momentum is expected to drive broader equity markets, even as risks persist from elevated inflation and surging government bond yields, according to JPMorgan analysts.

In a note, the analysts stated that while these headwinds might grow "more significant," they probably won't "derail" the constructive stock market outlook—provided that "inflation expectations do not get de-anchored."

Global government borrowing costs have climbed to near multi-decade peaks in recent days, reflecting concerns about price pressures and rising interest rates.

Partially underpinning these fears is the ongoing war in Iran, which has triggered an oil price shock that has, in turn, driven up inflation and reinforced expectations of imminent monetary tightening by central banks.

Analysts have highlighted that Federal Reserve Chair Kevin Warsh used hawkish language during a closely watched speech at the Fed's Jackson Hole symposium, strengthening expectations that the U.S. central bank could raise rates as early as next week. The European Central Bank, meanwhile, is widely expected to do the same on Thursday following its latest policy meeting.

At the same time, the U.S. national debt has surpassed $40 trillion for the first time, raising doubts about the country's financial stability. Based on data cited by Reuters, debt as a share of economic output is also at or above 100% across the G7 group of major economies—except for Germany.

"As a result, many continue to fear a material correction in equity markets as well," the JPMorgan analysts cautioned. In theory, a rise in bond yields, which move inversely to debt prices, can make equities especially less attractive.

However, any bout of weakness in stock prices might simply make them cheaper for investors already drawn to corporate profits "on an uptrend," the JPMorgan analysts said.

"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," they added, referring to the earlier series of rate hikes aimed at containing the post-pandemic surge in inflation.

They predicted that, if a solid macroeconomic outlook for the second half "keep gaining traction," that should be supportive of "further equity upside."

"Encouragingly, improving corporate confidence is feeding through into a recovery in non‑tech activity, visible in the upturn in global (ex‑China) manufacturing output and U.S. non‑tech capex/structures," they wrote.

Against this backdrop, the JPMorgan analysts argued that investors "should continue using the dips" in market prices "to add" to their positions.