JPMorgan remains positive on equities for the second half of the year, arguing that concerns surrounding geopolitics, inflation, market concentration, the economic cycle and weakness in bonds are unlikely to prevent stocks from advancing further. The bank expects broader participation in the rally, with cyclical and higher-beta areas potentially taking a greater role as the year progresses.
JPMorgan expects fresh record highs
JPMorgan strategists continue to believe major equity benchmarks have room to move higher during the second half.
“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.
The bullish outlook comes despite several risks that have weighed on investor sentiment, including geopolitical uncertainty, concerns about renewed inflation, concentrated leadership among a small group of stocks and the recent bond-market selloff.
Rather than expecting these issues to derail equities, JPMorgan believes the underlying macroeconomic environment remains supportive enough for markets to establish new highs.
Stock market rally expected to broaden
JPMorgan has been anticipating a rotation beneath the headline indices for approximately two months and expects that process to continue.
The bank recently identified renewed strength in momentum strategies, particularly among semiconductor stocks.
However, it does not expect technology to dominate market performance during the second half to the same extent that it did last summer.
Instead, a wider range of industries and investment styles could participate in the next stage of the rally, reducing some of the concentration that has characterised previous advances.
Volatility could remain elevated
A positive outlook does not mean JPMorgan expects markets to move higher without setbacks.
The strategists said concerns surrounding corporate profitability are “likely to keep coming back from time to time,” potentially maintaining elevated levels of market volatility.
Even so, the bank does not see the current environment as comparable with 2022.
JPMorgan expects relatively limited inflationary pressure and does not anticipate that central banks will need to respond with substantially more aggressive monetary policy.
That distinction is important because a renewed tightening cycle could place greater pressure on both equity valuations and economic activity.
Softer labour market could support stocks
The U.S. labour market presents a more mixed picture, with JPMorgan highlighting indicators pointing to weaker sentiment surrounding employment.
Rather than necessarily representing a negative development for equities, softer labour data could generate a “bad is good” market reaction.
Weaker employment conditions may reduce concerns that the U.S. economy is overheating and consequently lower the likelihood that the Federal Reserve will need to tighten policy further.
JPMorgan also identified a weaker U.S. dollar as a supportive factor, particularly for international equities.
Earnings season provides reassurance
Corporate earnings have provided another reason for JPMorgan’s constructive stance.
The strategists had previously expected the second-quarter reporting season to reassure investors, and they believe that forecast has been validated.
Both U.S. and European companies have generated year-over-year earnings-per-share growth above 20%, providing fundamental support for equity valuations.
Strong earnings growth is particularly important as investors assess whether markets can continue advancing after already delivering substantial gains.
Defensive rotation seen as temporary
JPMorgan also revisited its earlier expectation for a period of consolidation among higher-beta stocks and a short-term recovery in low-volatility shares.
That rotation helped defensive sectors such as healthcare and consumer staples outperform for a period.
However, the strategists continue to view the move as “likely to be only tactical,” rather than the beginning of a sustained defensive shift.
They expect the trend to last only a matter of weeks rather than dominate the second half.
JPMorgan has subsequently called for higher-beta stocks to resume their advance, noting that low-volatility groups “have rolled over again.”
Cyclical stocks could take leadership
A steepening yield curve provides another potential tailwind for economically sensitive areas of the market.
Within cyclicals, JPMorgan highlighted banks, mining companies, industrials and consumer cyclicals as attractive opportunities.
The bank also expects the semiconductor trade to stabilise after recent volatility, potentially allowing chip stocks to participate in a broader market advance without technology necessarily becoming the dominant second-half sector.
This combination would represent a shift towards wider market leadership and greater participation from companies whose performance is more closely linked to economic activity.
High-beta stocks could outperform
JPMorgan’s second-half outlook ultimately depends on its broader macroeconomic expectations continuing to develop as anticipated.
“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.
With earnings growth remaining strong, inflation pressures expected to stay contained and the Fed potentially facing less need to tighten policy, JPMorgan sees conditions for equity indices to reach fresh records.
The bank’s preference for cyclicals and higher-beta stocks also suggests that it expects the next phase of the rally to become broader rather than remain dependent on a narrow group of technology leaders.
