JPMorgan expects equities to continue advancing into the end of the year, but believes the next stage of the rally will be characterised by changing market leadership rather than an indiscriminate rise across stocks.
“In equities, we stay constructive into year-end, expecting a grind higher with rotation rather than a broad melt-up move,” strategist Fabio Bassi wrote.
The recent rebound in semiconductor shares is viewed by the bank as a sign that risk appetite is recovering tactically. JPMorgan also believes the Federal Reserve’s willingness to remain patient should help limit volatility, leaving positioning and dispersion as important drivers of market performance.
Semiconductors offer opportunities after repricing
Quality Growth and hyperscalers remain among JPMorgan’s preferred equity exposures. The bank also sees semiconductors as increasingly attractive following the sector’s recent repricing.
A favourable combination of continued disinflation and a Fed that keeps monetary policy unchanged could allow participation in the equity rally to expand, JPMorgan said.
The bank is also monitoring developments in bond markets after a significant selloff in longer-dated debt led to renewed steepening of developed-market yield curves.
JPMorgan said part of the move reflects supply-driven “crowding out,” with the substantial capital expenditure requirements of hyperscalers competing with sovereign governments for available capital. At the same time, growing confidence that AI spending can ultimately be monetised is improving expectations for real investment returns.
Bond selloff does not point to policy error, JPMorgan says
The increase in longer-term yields is not currently viewed by JPMorgan as a warning that monetary policy has become dangerously restrictive.
“Higher long-end yields and steeper curves may reflect higher demand for capital and investment opportunities more than policy-error fears,” the bank wrote.
JPMorgan’s central scenario assumes term premiums rise only modestly from current levels. Under those conditions, the bank does not expect higher long-term yields to become a trigger for widespread risk aversion.
Fed debate likely to continue beyond Jackson Hole
The US Treasury’s decision to increase buybacks of 10-year and 30-year debt also attracted JPMorgan’s attention. The bank said the larger purchases suggested policymakers were uncomfortable with the recent rise in long-term yields.
JPMorgan does not expect Jackson Hole to resolve the debate over how the Fed will respond to changing economic conditions.
For equities, the bank therefore continues to see a constructive backdrop, with further upside potentially coming through sector and style rotation rather than a broad market melt-up.
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