As the conflict in the Middle East exacerbates inflation concerns, investors are betting that newly appointed Federal Reserve Chairman Kevin Warsh will prioritize safeguarding the central bank’s credibility in fighting inflation over catering to Trump’s demands for rate cuts. Consequently, market expectations for the Fed to raise interest rates to curb inflation are increasingly heating up. However, according to JPMorgan strategist Mislav Matejka, the market is currently overpricing the risk of potential Fed rate hikes, which creates conditions for a rebound in low-volatility stocks such as consumer staples and utilities.
Low-volatility stocks have been overlooked by the market amid the artificial intelligence-driven rally. A Goldman Sachs index tracking the performance of U.S. economic cycle stocks relative to defensive stocks has risen to levels seen 18 years ago. The recent surge in global yields has also diminished the appeal of these stocks as “bond substitutes.”
Although investors worry that an energy price shock triggered by the Middle East conflict could lead to a wave of rate hikes similar to those following the Russia-Ukraine war in 2022, Matejka’s JPMorgan strategy team argues that the current market environment is significantly different from that time. In a report, the strategists state that as all parties involved in the conflict ultimately focus on finding an “exit path,” both bond yields and oil prices will decline over the next six to twelve months. Weakening expectations for U.S. employment and wage growth will make it harder for a “wage-price stagflationary spiral” to form, so they do not believe stagflation will be the most likely outcome in the second half of the year. Additionally, corporate earnings outlooks are expected to remain strong.
Meanwhile, strategists at both JPMorgan and Morgan Stanley have recently offered optimistic outlooks for the broader U.S. stock market. A JPMorgan strategy team led by Kriti Gupta notes that driven by the tech stock bull market led by the AI computing power investment theme, the S&P 500 could break through 9,000 points within the next year. The team believes the actual scale of the AI super-cycle may exceed previous expectations and serve as the core engine for sustained market gains. The 9,000-point target implies an increase of about 22% from current levels. The strategists point out that while this is not the most likely bullish scenario, it is entirely achievable under specific conditions.
Additionally, Mike Wilson, a well-known Morgan Stanley strategist who had long held a cautious stance, turned bullish on U.S. stocks earlier this month. Wilson expects the S&P 500 to rise to 8,300 points over the next 12 months and to approach 8,000 points by the end of this year. According to his forecast, the S&P 500 could see a cumulative gain of approximately 130% over the next five years, marking its best performance since the dot-com bubble era. Wilson states that corporate earnings growth will remain the core driver of the stock market rally over the next 12 months, while the accelerated adoption of AI applications, improved operating leverage, and continued efficiency gains by companies will further strengthen earnings performance. He notes that despite factors such as geopolitical risks, corporate earnings data continue to show resilience, supporting his continued bullish view on the market.
