Stocks have taken a beating as bond yields climb toward multidecade highs. The mood on trading desks has turned noticeably gloomier in recent weeks.
One of Wall Street’s biggest banks thinks that gloom has gone too far.
JPMorgan strategists are telling clients the recent selloff looks overdone. They are pointing to specific data to back up a call for stocks to rebound into year-end. Here is the full case they are making, and what it means for where to put money next.
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JPMorgan sees bonds and stocks as oversold
JPMorgan strategists led by Mislav Matejka argue equity sentiment has turned overly bearish. They say the fundamentals driving the selloff look less threatening than the price action suggests.
For most of the year, equities absorbed rising yields without much trouble. Yields climbed about 100 basis points year to date, even as stocks posted double-digit gains. Risk assets finally succumbed to the pressure in recent weeks, as reported by Investing.com.
The team also pointed to history as a reason for calm. The start of Fed tightening cycles has historically confirmed the economy was strong rather than served as a signal to sell. That is a pattern investors should keep in mind, given how sharply sentiment has shifted.
Bonds themselves look close to oversold territory by JPMorgan’s own measures. Fed funds futures, which have repriced nearly 200 basis points higher this year, have stopped climbing. Strategists note that more than three additional rate hikes are already priced in and inflation expectations remain anchored despite soft wage growth.
Stocks have taken a beating as bond yields climb toward multidecade highs.Bloomberg / Getty Images
The earnings and growth case for a rebound
Q3 earnings are days away. JPMorgan’s base case is that companies deliver. Revisions are expected to remain positive across most regions, despite a market that has been quicker to punish misses.
That earnings confidence is being reinforced by stronger economic data out of Europe. The S&P Global Eurozone Composite PMI rose to 53.1 in September from 52 in August. That is its highest level in almost three and a half years, signaling the fastest pace of private sector growth the region has seen since early 2023, according to Reuters.
Germany’s numbers backed that up. The Ifo Business Climate Index hit 89.9 in September, a tick above August’s 88.8 and the highest it has been since May 2023. Five months of improving sentiment, even with energy bills climbing, according to Reuters.
The improvement has not been limited to sentiment surveys alone. Eurozone services activity expanded for a third straight month and manufacturing output also accelerated. Activity returned to growth in both Germany and France, even as inflation in the bloc jumped to 3.8% on soaring energy costs.
Oil risk and where JPMorgan wants exposure
Oil has no clean answer right now. JPMorgan’s working assumption is that the worst of the pressure holds off through October. Midterm season tends to make policymakers cautious, and that caution usually means fewer moves that light energy prices up.
The long end of the Treasury curve has stayed especially stubborn through this stretch, with the 10-year yield hovering around 5.2%. That held even after a disappointing September payroll report reduced expectations for another Fed hike in October, according to CNBC.
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The bank has stuck with a contrarian playbook on Middle East risk. JPMorgan has argued since March that investors should treat bouts of Iran-related weakness as buying opportunities. Anyone selling into de-risking episodes risks getting whipsawed as the conflict eventually de-escalates.
That framing lines up with JPMorgan’s broader bond market research. The bank’s work shows that the pace and cause of Treasury yield moves matter for equities, with gradual increases generally easier for the S&P 500 to absorb. The bank has separately flagged that AI-driven momentum names remain vulnerable to further swings in Treasury yields, according to TheStreet.
On sector positioning, JPMorgan expects cyclicals such as financials, industrials and commodities to lead any recovery alongside a rebound in technology. Semiconductors are its top pick, followed by hyperscalers. The bank remains more cautious on AI-exposed software and services names specifically.
JPMorgan does not see the bond-driven unwind in crowded momentum trades as a warning sign. The bank reads it as a reset, one that clears the way for stocks to push higher once positioning gets cleaner.
What investors should watch going forward
JPMorgan is leaning toward emerging markets over developed ones. The UK is among the names the bank keeps coming back to. Valuations are cheap relative to peers, and the dividend yield is the highest of any major market. France is a different story. The political noise there has made broader Eurozone exposure a harder sell.
Investors should watch whether upcoming earnings actually deliver the positive revisions JPMorgan expects. A disappointing start to the reporting season would weaken the bank’s argument that fundamentals remain stronger than recent price action suggests. The bank has acknowledged that risk in prior notes warning that AI-exposed names face a harder math as discount rates rise, according to TheStreet.
The clearest signal to watch may simply be the bond market itself. JPMorgan’s own research has shown that extreme yield spikes tend to precede weak equity returns before conditions normalize. A moderation in the pace of the increase could make the environment easier for stocks to digest.
Jamie Dimon himself warned separately that inflation may not yet be fully contained and that interest rates could remain substantially higher than investors expect. That complicates the very recovery JPMorgan’s equity strategists are calling for.
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