JP Morgan: US stock market is pricing the risk of rate hike too high. Low volatility stocks such as consumer staples and utilities are set to rebound.

With the intensification of the Middle East conflict and inflation concerns, as well as investors betting that the new Federal Reserve Chairman Kevin Wash will prioritize maintaining the central bank's reputation in combating inflation over catering to US President Trump's demands to lower interest rates, market expectations for the Fed to raise rates to curb inflation are increasingly on the rise. However, according to JPMorgan strategist Mislav Matijka, the market is currently pricing the potential risks of a Fed rate hike too high, creating conditions for a rebound in low-volatility stocks such as consumer staples and utilities. It is reported that in the AI-driven stock market rally, low-volatility stocks have been overlooked by the market. An index tracking the performance of cyclical stocks relative to defensive stocks has now risen to levels not seen in 18 years. In addition, the recent surge in global bond yields has also diminished the attractiveness of these stocks as "bond proxies." While investors are worried that the energy price shock caused by the Middle East conflict will lead to a round of rate hikes similar to that of the Russia-Ukraine conflict in 2022, the team led by Matijka at JP Morgan believes that the current market environment is clearly different from that time. These strategists stated in a report that conflicts will eventually focus on finding "exit paths," and in the next 6 to 12 months, bond yields and oil prices will fall. The strategists wrote that weakened US job and wage growth expectations will make it "more difficult for the wage-price spiral of stagflation to form," so they do not believe stagflation is the most likely outcome for the second half of the year. In addition, they also expect that corporate earnings prospects will remain strong. Matijka stated that in recent months, low-volatility stocks with minimal price volatility in the US and European markets have performed "very poorly" due to fluctuations in bond yields. He pointed out that this provides an opportunity to add these stocks to the portfolio. These stocks also include insurance and some industrial stocks, and regardless of the direction of future yield changes, they have value. Matijka's views are similar to those of global asset management giant BlackRock. Naveen Segar, head of global fixed income for BlackRock Asia Pacific, believes that under Wash's leadership, the Fed may have enough reason to choose rate cuts over rate hikes. When asked about the possibility of rate hikes during Wash's term, Segar said, "If you force me to choose between rate hikes and cuts, I think there are enough reasons to support cuts." He added, "Looking ahead, the labor market may come under some pressure, which could mean the Fed either stays put or cuts rates." Segar believes that while there are some "tailwinds" for the US economy, such as the AI investment boom, the labor market may come under pressure in the future. He pointed out that the US economy appears strong at the moment, partly because businesses are investing heavily in AI, but a significant portion of this investment is ultimately aimed at replacing human labor with machines or software. He said, "In a situation where it is uncertain whether the economy will strengthen or weaken in the next year, the safest approach may be to do nothing." JPMorgan and JP Morgan Stanley are both bullish on US stocks Meanwhile, strategists from JPMorgan and Morgan Stanley have recently given optimistic outlooks on the broader US stock market. A team of strategists led by Kriti Gupta at JPMorgan pointed out in a research report that under the raging bull market dominance of the AI compute theme in the US stock market this year, the S&P 500 index could surpass the seemingly unreachable epic level of 9000 points within the next year. The team's report showed that the strong performance of the technology sector in the US stock market this year has been mainly driven by the resilience of corporate earnings and optimistic growth expectations, both closely related to the global expansion of AI compute infrastructure spending led by US tech giants. The team believes that the actual size of the AI super cycle may exceed the institution's previous expectations and become the core engine for the market's continued rise. The target level of 9000 points for the S&P 500 index implies a 22% increase from current levels. Gupta and other strategists pointed out in the report, "While this is not the most likely bull market scenario, the S&P 500 index does have the potential to reach the historical high level of 9000 points by mid-2027. The 22% upside from current levels may seem overly optimistic, but under certain conditions it is entirely possible to achieve." The strategists believe that if AI significantly drives total factor productivity level growth, the valuation expansion of tech stocks will receive incredibly solid fundamental support. In addition, with the AI boom, expanding corporate earnings, and the resilience of the US economy, Mike Wilson, a renowned strategist at Morgan Stanley who had long been cautious, has also turned bullish on US stocks earlier this month. Wilson expects the S&P 500 index to rise to 8300 points in the next 12 months and to reach around 8000 points by the end of this year. Wilson was once one of Wall Street's most famous "bears." After the launch of ChatGPT by OpenAI in November 2022, the US stock market began an AI bull market rally, but Wilson had long maintained a cautious attitude. Now, he believes that US stocks will continue to reach new historical highs. According to his forecast, the cumulative return of the S&P 500 index in the next five years could reach about 130%, marking the best performance since the dot-com bubble era. Wilson stated that corporate earnings growth in the next 12 months will remain the core driver of stock market gains, and the accelerated adoption of AI applications, improved operating leverage, and ongoing efforts by companies to enhance efficiency will further strengthen earnings performance. He said, "Despite geopolitical risks, private credit issues, and industry disruptions caused by AI, corporate earnings data still show resilience, which supports our continued positive outlook on the market."