JPMorgan expects global equity markets to extend their advance during the second half of the year, with stronger earnings, limited inflation pressure and a broader rotation towards cyclical and higher-beta stocks creating a supportive backdrop. While geopolitical risks and bond-market volatility remain concerns, the bank does not believe they will prevent major indices from reaching new records.
New market highs remain JPMorgan’s base case
The Wall Street bank continues to favour equities despite a long list of risks confronting investors.
“We believe equity indices should be making fresh all-time highs in 2H, and look for further upside,” the bank’s strategists said in a note.
JPMorgan has pushed back against fears surrounding geopolitical instability, inflation, concentrated market leadership, the direction of the economic cycle and weakness across bond markets.
Its central argument is that the macroeconomic and corporate earnings backdrop remains strong enough to outweigh these risks.
Market leadership could become less concentrated
One important element of JPMorgan’s outlook is an expected broadening of the equity rally.
The firm has been looking for greater participation beyond the largest index leaders for the past two months and continues to expect that trend to develop.
Momentum strategies have begun to recover, with semiconductors showing particular improvement.
However, JPMorgan does not anticipate another period in which technology dominates the entire market in the way it did last summer.
Instead, investors could see stronger participation from cyclical sectors and other areas that previously lagged the major technology names.
Market swings unlikely to disappear
JPMorgan still expects periods of elevated volatility as investors repeatedly reassess corporate profitability and economic conditions.
Profitability worries are “likely to keep coming back from time to time,” according to the strategists.
However, the bank sees an important difference between the present environment and the inflation shock experienced in 2022.
It does not expect significant additional inflation pressure and therefore sees less risk that central banks will be forced into a much more aggressive policy stance.
That should help limit one of the biggest potential threats to equity valuations.
Weak jobs data could become good news for markets
Signs of softness in the labour market could also work in favour of stocks under certain circumstances.
JPMorgan described employment conditions as mixed, with some indicators showing weaker sentiment around jobs.
That backdrop creates the possibility of a “bad is good” response from investors.
Softer labour data could reduce fears of economic overheating and make the Federal Reserve less inclined to tighten monetary policy.
A weaker dollar provides another potential benefit, particularly for markets and companies outside the United States.
Strong earnings underpin bullish outlook
Corporate profits remain central to JPMorgan’s argument for further market gains.
The bank had expected second-quarter earnings to provide reassurance, and the results have supported that view.
Year-over-year EPS growth has exceeded 20% in both the United States and Europe.
Such strong profit growth gives investors greater fundamental justification for elevated equity prices and could help markets absorb periods of volatility.
Defensive trade begins to fade
JPMorgan previously expected higher-beta stocks to consolidate while defensive, low-volatility areas enjoyed a temporary rebound.
Healthcare and consumer staples benefited from that shift, but the bank never expected the defensive move to persist throughout the second half.
It described the rotation as “likely to be only tactical,” lasting several weeks rather than becoming a sustained market trend.
That view appears to be playing out, with JPMorgan observing that low-volatility stocks “have rolled over again.”
The bank now expects higher-beta shares to regain momentum.
Banks, miners and industrials stand out
A steepening yield curve strengthens the case for cyclical market exposure, according to JPMorgan.
The strategists highlighted banks, mining companies, industrial stocks and consumer cyclicals as attractive areas.
Semiconductors could also stabilise after recent volatility, providing another source of market participation.
A stronger performance from these groups would make the rally less dependent on mega-cap technology and create healthier breadth across equity indices.
High-beta trade could drive next phase of rally
JPMorgan believes the combination of strong earnings, manageable inflation, less aggressive monetary-policy risks and broader market participation could support another leg higher for stocks.
“If the macro outlook we envisaged for 2H keeps gaining traction, that should be supportive for further equity upside, but also for more of a high beta outperformance,” the strategists wrote.
The bank therefore sees the possibility of both fresh index records and a change in leadership beneath the surface.
Rather than technology alone driving returns, JPMorgan expects cyclical and higher-beta stocks to play a larger role if its second-half economic scenario continues to unfold.
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