JPMorgan: Bond Yields Rise, but Earnings Support Equities
JPMorgan argues that corporate profit growth provides a buffer against rising government bond yields, distinguishing the current market cycle from the 2022 downturn.
JPMorgan analysts assert that rising government bond yields and inflation pressures are unlikely to disrupt the current equity market trajectory, provided corporate earnings momentum persists. The bank’s research team, as reported by GN markets/earnings (en-US), indicates that while macroeconomic headwinds are becoming more pronounced, they do not currently threaten the fundamental support for stock prices.
The primary risk to this outlook is the anchoring of inflation expectations. Higher oil prices driven by the conflict in Iran have intensified inflation concerns and increased expectations for tighter monetary policy from major central banks. However, JPMorgan maintains that the current environment differs significantly from 2022 because corporate profits are trending upward rather than declining.
Sovereign Debt Reaches Historic Highs
Government borrowing costs have approached multi-decade highs as investors reassess persistent inflation and mounting sovereign debt levels. U.S. government debt has surpassed $40 trillion for the first time, a milestone that exacerbates fiscal pressure. Across the G7, debt relative to economic output is at or above 100% in all economies except Germany, according to data cited in the report.
These fiscal conditions contribute to a broader environment where higher yields make fixed-income assets relatively more attractive compared to equities. This dynamic places pressure on stock valuations by increasing the discount rate applied to future corporate cash flows, potentially reducing the relative appeal of riskier equity investments.
Monetary Policy Tightening Accelerates
Central banks are responding to the inflationary pressure with increasingly hawkish signals. Federal Reserve Chair Kevin Warsh recently used strict language at the Jackson Hole symposium, reinforcing expectations for a possible U.S. rate increase as soon as next week. The European Central Bank is also expected to raise rates following its recent policy meeting, indicating a synchronized global tightening stance.
Earnings Growth Acts as Buffer
JPMorgan identifies corporate earnings as the critical counterweight to rising yields. The analysts note that profits remain on an uptrend, suggesting that any equity weakness may result in lower valuations without altering the underlying trajectory of business performance. This stands in contrast to 2022, where significant central bank tightening coincided with a sustained fall in equity prices due to deteriorating profit expectations.
The market outlook remains sensitive to whether the macroeconomic picture strengthens in the second half of the year. If inflation expectations remain anchored and earnings growth continues, JPMorgan believes the equity market can withstand the pressure from higher bond yields. Conversely, if inflation expectations de-anchor, the risks to equity valuations could become more significant.
