With U.S. Treasury yields currently approaching the critical 5% threshold, combined with seasonal factors and disturbances from events such as the midterm elections, global equity markets are facing near-term corrective pressure in the short term. However, JPMorgan (JPM) believes that this represents normal profit-taking against the backdrop of slowing earnings growth, rather than a trend reversal. The true medium-term test lies in whether large-scale AI investments can deliver capital returns—both for technology giants and for end users purchasing AI services—and this will be the key variable determining market direction.
At the same time, market speculation that the Federal Reserve may be forced to raise interest rates is heating up, with the probability of a rate hike at the September meeting implied by current pricing having risen to 69%.
Grace Peters, Head of Global Investment Strategy at JPMorgan Private Bank, stated that the 5% yield threshold has a significant psychological impact on equity markets. Coupled with the fact that September has historically been a weak month for U.S. stocks, the approaching midterm elections, and the waning catalytic effect of the second-quarter earnings season, equity markets may experience “knee-jerk” selling. She expects that ahead of risk events such as this November, U.S. and European equity markets could see a pullback of 5% to 8%, but this constitutes healthy profit-taking rather than a structural collapse. Peters also believes that there is still further upside potential for U.S. and European stocks this year.
On the earnings front, Peters said that the second-quarter trend of 30% earnings growth for U.S. companies and approximately 15% for European companies is unsustainable, and the pace of growth is expected to slow. However, she emphasized that the breadth of this earnings expansion is noteworthy—contributions from the financials, industrials, and utilities sectors reflect a healthier market structure than one driven solely by technology.
The rise in yields has already placed substantial pressure on the U.S. housing market and the automotive industry. Data show that the median U.S. home price stands at $400,000, while most households can only afford approximately $300,000, and the median age of first-time homebuyers has risen from 30 in 2008 to 40 today. Meanwhile, the delinquency rate for multifamily residential properties has climbed to its highest level since 2004, surpassing even the post-global-financial-crisis peak. Slok pointed out that interest rates are restrictive for the housing market, but their impact on the AI sector is limited.
In terms of sector allocation, Peters ranks utilities, financials, and technology as preferred choices. She believes that utilities not only play the role of power suppliers for AI infrastructure, but power supply constraints may also become a bottleneck for AI expansion, much like memory chip shortages. JPMorgan’s core view remains that a capital expenditure super-cycle will drive an earnings super-cycle, with the U.S. and emerging markets as preferred equity markets, while Europe is viewed as a neutral market.
