What is JPMorgan’s latest view on bond markets?
JPMorgan strategists led by Mislav Matejka believe the recent rise in government bond yields may be losing momentum, potentially improving conditions for equity markets through the end of 2026.
The bank previously identified signs that the increase in yields had become extended and that bonds were entering oversold territory.
Its fixed income team’s year-end forecasts for longer-dated yields across major markets are now broadly in line with or below prevailing levels.
The outlook suggests that further substantial increases in borrowing costs are not central to JPMorgan’s current market expectations.
Why would stable yields benefit equity valuations?
Higher government bond yields have contributed to declining equity valuation multiples by increasing the cost of capital and changing the relative returns available to investors.
During the recent bond market selloff, forward price-to-earnings multiples fell by three points for the S&P 500 and MSCI All-Country World Equity Index.
European equity multiples declined by approximately two points.
JPMorgan believes the pressure on valuations could moderate if yields stop rising.
“The multiple compression might not need to continue,” the strategists said.
The bank also expects more stable yields to ease concerns about consumer finances, the durability of the economic cycle and funding costs for AI-related investment.
Have markets already adjusted to the Federal Reserve’s interest rate outlook?
JPMorgan believes that most of the repricing associated with Federal Reserve interest rate expectations has already occurred.
The strategists said changes in federal funds futures account for nearly all of the increase in the 10-year US Treasury yield this year.
They do not anticipate substantial further adjustments to the market’s expectations for US policy rates.
Inflation expectations also remain contained, according to consumer surveys and financial market measures.
Although recent US inflation figures have been elevated, JPMorgan estimates that underlying inflation is only around 0.3 percentage points above levels before the Iran war.
European core inflation trends remain broadly similar to their pre-conflict levels, while wage growth and wage expectations remain subdued.
Could AI debt issuance or European sovereign risks disrupt the outlook?
JPMorgan does not expect borrowing by AI-related companies to materially reduce demand for government bonds.
The bank also believes free cash flow at major hyperscale technology companies could prove better than current forecasts suggest.
In Europe, the strategists identified France as an ongoing concern but did not consider a broader sovereign debt crisis their central scenario.
They cited the European Central Bank’s policy tools, stronger banking sector balance sheets, more diversified sovereign bond holdings and lower credit defaults than during the 2010–2012 eurozone debt crisis.
These factors support JPMorgan’s view that current financial risks may remain contained, although they have not been eliminated.
What do corporate earnings suggest about the year-end equity outlook?
JPMorgan described the early third-quarter earnings season as broadly supportive of equities.
Among the first 29 US companies and 14 European companies to report, most exceeded earnings expectations and raised their guidance.
The bank believes continued earnings growth, combined with stabilising bond yields, could help global stock markets recover from recent valuation pressure.
Oil prices remain a source of uncertainty because of their potential effects on inflation and monetary policy expectations.
Nevertheless, the strategists concluded that equities could perform positively through year-end if bond yields and corporate earnings develop in line with their forecasts.
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