JPMorgan: Strong Earnings Can Shield Stocks From Rising Bond Yields

Strong corporate earnings momentum is likely to support further gains in equity markets, even as they face significant headwinds from rising government bond yields and inflation, according to a new analysis from JPMorgan.

In a note to clients, the bank's analysts said that while these challenges could become "more significant," they are unlikely to "derail" the constructive stock market picture, provided that "inflation expectations do not get de-anchored."

Earnings as a Buffer

Theoretically, a climb in yields on safer government bonds makes riskier assets like equities less attractive by comparison. However, JPMorgan suggests any resulting weakness in stock prices could simply make them cheaper for investors focused on corporate profits that are "on an uptrend."

This outlook marks a "huge contrast to 2022," the analysts wrote, when central banks had to tighten monetary policy significantly, resulting in a sustained fall in equity prices. They predict that a solid macroeconomic outlook for the second half of the year should support "further equity upside."

Macroeconomic Headwinds

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The optimistic forecast comes as government borrowing costs around the world have surged to near multi-decade highs. According to the source, these moves reflect investor concerns over several key factors:

• Persistent Inflation: An oil price shock, reportedly sparked by the war in Iran, has pushed up inflation.
• Central Bank Tightening: Hawkish language from Federal Reserve Chair Kevin Warsh has boosted expectations for a U.S. rate hike, while the European Central Bank is also expected to raise rates this week.
• Rising Debt: The U.S. national debt pile has surpassed $40 trillion for the first time, and debt-to-GDP ratios are at or above 100% across most G7 economies, excluding Germany, per data cited by Reuters.

Improving Business Confidence

Despite these risks, JPMorgan pointed to positive underlying economic trends. The analysts noted that "improving corporate confidence is feeding through into a recovery in non‑tech activity."

This recovery is visible in the recent "upturn in global (ex‑China) manufacturing output and U.S. non‑tech capex/structures," they wrote. Against this backdrop, the analysts argued that investors "should continue using the dips" in market prices "to add" to their positions.