Is the Bond Sell-Off Getting Stretched? JPMorgan Sees Room for an Equity Rebound
The global bond sell-off has become one of the biggest challenges facing financial markets, but JPMorgan strategists believe the recent move in yields may be approaching an extreme and that equities could have room to rebound into year-end.
The argument is notable because higher government bond yields have increasingly pressured stocks this year. Yet JPMorgan says the relationship between rising yields and equities is not necessarily as bearish as recent market sentiment suggests. The bank points to signs that bond markets are becoming oversold, inflation expectations remain relatively contained and corporate earnings momentum is still supportive.
For investors, the central question is no longer simply whether bond yields are high. It is whether yields can continue rising fast enough to force a much deeper repricing of equities.
Why the Bond Sell-Off Matters for Stocks
Bond yields are effectively the return investors can demand from relatively low-risk government debt. When those yields rise sharply, equities have to compete with a more attractive alternative.
Higher yields can also reduce the present value of future corporate profits, particularly for growth companies whose earnings are expected far into the future.
That is why the recent rise in Treasury yields has created concern despite the resilience of major stock indexes.
The U.S. 10-year Treasury yield recently moved above 5.2%, reaching levels not seen since the mid-2000s. The move has been driven by a combination of inflation concerns, higher energy prices, strong economic activity and worries about government borrowing.
The unusual feature of the current cycle is that equities have remained relatively resilient while bonds have sold off heavily.
JPMorgan argues that this divergence can persist if economic growth and corporate earnings remain strong enough to offset the valuation pressure created by higher yields.
JPMorgan Says Bonds May Be Near Oversold Territory
JPMorgan's strategists, led by Mislav Matejka, argue that the bond sell-off may have become stretched.
According to the bank, bond markets are approaching oversold conditions, while futures pricing for Federal Reserve policy has already undergone a substantial repricing. Fed funds futures have moved almost 200 basis points higher this year, with more than three additional rate increases already reflected in market pricing, according to JPMorgan's analysis.
The implication is important: if markets have already priced in a significant amount of additional monetary tightening, bond yields may need increasingly strong economic or inflationary news to move substantially higher from here.
That does not mean yields must fall immediately.
Rather, JPMorgan's argument is that the marginal pressure from further rate repricing could diminish, giving equity markets some breathing room.
Weak U.S. Jobs Data Adds to the Case
The latest U.S. employment report has strengthened that argument.
U.S. employers added only 29,000 jobs in September, far below expectations, while the unemployment rate increased to 4.2%. Earlier payroll figures were also revised lower.
The weak report sharply reduced market expectations for a Federal Reserve rate increase in October. Reuters reported that the implied probability of an October hike fell below 20%, compared with around 64% a week earlier. A December hike remains a possibility.
For bond investors, weaker labour-market data can reduce pressure on the Fed to keep tightening.
For equity investors, the interpretation is more complicated.
If employment is cooling without a major collapse in economic activity, stocks can benefit from lower expectations for additional rate increases. But if the labour-market deterioration becomes severe, weaker corporate earnings could eventually overwhelm the benefit of lower rates.
That distinction will be crucial over the coming months.
Earnings Could Give Stocks Another Lift
JPMorgan's bullish argument is not based entirely on interest rates.
The bank expects third-quarter earnings to remain robust, with earnings revisions still positive across many regions. It also points to improving purchasing managers' indexes, including four consecutive months of improvement in Eurozone PMIs and a German IFO survey that reached a three-year high.
This matters because stock valuations cannot be assessed through bond yields alone.
If corporate profits are rising faster than expected, investors may tolerate higher interest rates because the underlying earnings base is becoming stronger.
That could help explain why equities have remained surprisingly resilient even as government bonds have suffered.
The S&P 500, for example, has remained close to record territory despite the sharp rise in Treasury yields.
JPMorgan Sees Cyclicals and Technology Leading a Rebound
If equities recover, JPMorgan expects the leadership to broaden beyond the narrow group of mega-cap technology companies that has dominated much of the market.
The bank favours financials, industrials and commodities among cyclical sectors, while also expecting technology to recover.
Within technology, JPMorgan identifies semiconductors as its top preference, followed by hyperscalers. It remains more cautious on AI-exposed software and services companies.
That distinction is important.
The AI investment cycle continues to support semiconductor demand and data-centre spending, but some software companies have much higher valuations and could be more sensitive to rising discount rates.
If bond yields stabilize, investors may become more comfortable rotating into these higher-growth areas again.
Emerging Markets and the UK Also Look Interesting
JPMorgan is also overweight emerging markets relative to developed markets, citing valuation discounts.
The bank sees particular value in the UK, where the market offers a relatively high dividend yield compared with other major global equity markets.
That could be relevant for Indian investors looking at global diversification.
Emerging-market equities can benefit when U.S. rate expectations stabilize because pressure on the dollar and global financing conditions may ease. However, country-specific risks, currencies and commodity prices remain important.
JPMorgan is less optimistic about the Eurozone, where French political and fiscal uncertainty remains a significant headwind.
Why the Bond Market May Still Be Dangerous
The bullish equity argument should not be confused with an all-clear signal for bonds.
Several structural forces are keeping yields elevated.
The U.S. government continues to issue substantial amounts of debt, while higher energy prices have revived concerns about inflation. At the same time, investors are demanding more compensation for holding long-duration government bonds.
The U.S. 10-year Treasury yield has risen sharply in recent weeks, while the 30-year yield has also climbed to levels not seen in decades.
There is also a technical element to the sell-off. Portfolio rebalancing can amplify bond-market moves when yields rise quickly. Reuters recently reported that the sharp quarterly rise in Treasury yields could trigger significant institutional portfolio adjustments, including shifts between stocks and bonds.
So even if bonds look oversold, that does not guarantee an immediate reversal.
The Biggest Risk: Yields Keep Rising
For equity investors, the most important risk to JPMorgan's rebound scenario is a renewed acceleration in bond yields.
If the 10-year Treasury yield moves materially higher from current levels, investors could demand a larger risk premium from stocks.
That would be particularly challenging for expensive growth companies.
Another risk is oil. Brent crude has remained above $100 a barrel, adding pressure to inflation expectations and potentially limiting how quickly central banks can ease policy.
There is also the possibility that weak employment data is not merely a benign cooling signal but the beginning of a broader economic slowdown.
In that scenario, falling rate expectations would not necessarily be enough to support stocks because corporate earnings would come under pressure.
What Investors Should Watch Next
The next few weeks could determine whether JPMorgan's rebound thesis gains traction.
Investors should monitor:
U.S. 10-year and 30-year Treasury yields
Federal Reserve policy expectations
U.S. inflation data
December Fed rate-hike pricing
Third-quarter corporate earnings
Oil prices and energy-driven inflation
Credit-market spreads
Global PMI data
Performance of financials, industrials and semiconductors
Market breadth beyond mega-cap technology stocks
The most constructive signal would be a stabilization or decline in long-term bond yields alongside continued earnings strength.
A more worrying combination would be rising yields, widening credit spreads and weakening corporate earnings expectations occurring at the same time.
What It Means for Indian Investors
Indian investors should pay attention because U.S. bond yields influence global capital flows and valuations across emerging markets.
A stabilization in Treasury yields could reduce pressure on emerging-market assets and provide a more supportive backdrop for Indian equities. India's market has already shown sensitivity to oil prices and global rate expectations, while foreign portfolio flows remain an important driver of short-term sentiment. Reuters reported that Indian stocks rebounded on Monday as oil prices eased and fears of an immediate Fed hike diminished.
But the benefit is not automatic. A sustained rise in U.S. yields could strengthen the dollar and make emerging-market assets relatively less attractive.
For Indian investors, therefore, the key indicator is not simply whether the S&P 500 rises or falls. The direction of U.S. yields, the dollar, oil and global risk appetite can be equally important.
Bottom Line
JPMorgan believes the recent bond sell-off may be getting stretched, creating room for equities to rebound as investors move past some of the aggressive rate repricing seen this year. The bank sees support from improving earnings, better economic indicators, less extreme positioning and favourable seasonality.
But the rebound case depends heavily on bond yields stabilizing. If inflation, oil prices or fiscal concerns push yields substantially higher again, the pressure on equity valuations could return quickly.
For now, the key signal to watch is the interaction between Treasury yields and corporate earnings. If yields stop climbing while profits continue to improve, JPMorgan's equity-rebound scenario becomes more credible. If yields keep rising and earnings expectations deteriorate, investors may discover that the bond sell-off was not stretched after all.
Follow our blog for more global market, stock-market and investment updates.
This article is for informational and educational purposes only and should not be considered investment advice.