JPMorgan Says Strong Economy Justifies Rising Yields, Equity Rally to Continue

JPMorgan remains bullish on global equities through the end of the year, asserting that rising bond yields are unlikely to derail the stock market rally because they primarily reflect strengthening economic activity. Global equities have already gained 15% year-to-date in U.S. dollar terms, according to a note from the bank on Tuesday.

Economic Strength Underpins Outlook

Strategist Mislav Matejka wrote that the firm does not view the recent up-move in bond yields as an insurmountable obstacle for stocks. The primary driver, according to the note, is stronger economic momentum, which also supports corporate earnings.

JPMorgan highlighted that earnings per share (EPS) revisions have turned positive across all major regions. This corporate strength is supported by a rebound in Purchasing Managers' Indices (PMIs), with the bank noting that eurozone PMIs have now risen for three consecutive months.

Monetary Policy and Market Drivers

The bank also suggested that central banks may deliver less monetary tightening than markets are currently pricing. This view is based on the assessment that term premia have largely normalized and inflation expectations are not becoming de-anchored, pointing to soft wage growth and mixed labor market data.

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Furthermore, JPMorgan anticipates the U.S. dollar will peak, which would provide a tailwind for international stocks. The note also mentioned an expected bounce in gold prices following their recent pullback.

Shift in Market Leadership Expected

Looking ahead, JPMorgan expects a continued broadening of the market rally and does not foresee technology and AI stocks dominating returns in the second half of the year as they did previously. The bank stated its preference for cyclical stocks to lead the market.

Within the technology sector, the firm outlined a clear pecking order:

• Semiconductors are favored over hyperscalers.
• Hyperscalers are preferred over at-risk AI-related plays.