JPMorgan said global equity markets can absorb rate-hike shocks as long as the Federal Reserve keeps tightening gradually in an environment of strong earnings growth and anchored inflation expectations. According to Sina Finance, a team led by Mislav Matejka said the positive correlation between stocks and yields may continue, but the margin for error is narrowing; if the U.S. 10-year Treasury yield rises to about 5% to 5.5%, the risk that the relationship turns negative will increase.
The strategists said stocks have already priced in higher Treasury yields because the latest rise has been driven by improving economic activity and earnings upgrades, along with higher real rates rather than rising long-term inflation expectations. According to Sina Finance, the team also said short-term oil-price moves may determine risk appetite, seasonal factors are weak, investors remain worried about inflation, and third-quarter earnings reports starting in October may reassure the market.
In another report, a JPMorgan strategy team led by Dubravko Lakos-Bujas said equities could still cope if the Fed begins a mild tightening cycle that only reverses last year's preventive rate cuts. According to Sina Finance, the team said stocks would face significant downside risk if inflation accelerates again and markets begin pricing in a broader rate-hike cycle, but that is not its base case.