Have bond yields risen too far? JPMorgan’s Matejka sees relief ahead for equities

Investing.com -- After a sharp climb this year, bond yields look like they’re running out of steam, which JPMorgan strategists say could clear the way for stocks to push higher through year-end.

Strategists led by Mislav Matejka wrote that they argued two weeks ago the rise in yields "was showing signs of getting stretched, and that bonds were entering oversold territory." The bank’s fixed income team has year-end targets for long-end yields across major markets that are either flat or below current levels.

Stabilizing yields would help stocks by making the economic cycle look more sustainable, easing pressure on AI funding and consumer finances, and reducing the drive for valuation compression. During the most intense phase of the yield spike, forward price-to-earnings multiples fell 3 points for both the MSCI All-Country World Equity Index index and the S&P 500, and 2 points for Europe.

"The multiple compression might not need to continue," the strategists said.

Most of the adjustment in short-term rates has already occurred. The move in fed funds futures "pretty much fully explains" the rise in 10-year yields this year, they continued, and they do not expect further repricing of Fed rates beyond what markets already anticipate.

Inflation expectations also remain contained, based on consumer surveys and market pricing. While recent U.S. inflation prints have run hot, the bank said core inflation trends in Europe look similar to levels seen before the Iran war began, and only modestly higher in the U.S., by 0.3%. Wage growth and wage expectations remain soft.

JPMorgan’s house view is that AI-related debt issuance is unlikely to crowd out government bonds, and hyperscaler free cash flow could end up looking better than current projections once results arrive.

France remains a concern, the strategists said, though they do not believe markets should position for contagion, citing the European Central Bank’s available policy tools, stronger bank balance sheets than during the 2010-12 euro debt crisis, less concentrated sovereign bond holdings, and significantly lower credit defaults.

JPMorgan also pointed to an early, largely reassuring third-quarter earnings season, with the majority of the 29 U.S. and 14 European companies reporting so far delivering "beat and raise" results. Oil prices remain a wild card, but if bond yields and earnings play out as expected, "equities will be able to perform into year-end," the strategists wrote.

Original Article

You May Also Be Interested In

• US Treasury: 'Authorizing Wind Down Activities...the Offloading of Cargo Involving Certain Persons or Vessels Blocked on October 21, 2026'
• Graco falls 7% as third quarter results miss estimates
• Moody’s upgrades TSMC rating to Aa2 on booming AI demand and market dominance