Bond yields and cyclical bets in equities probably bottomed this month and are on their way up for the rest of 2021, with rising rates and pockets of “bubble-like behavior” unlikely to destabilize the stock market, according to a JPMorgan Chase & Co. report.

The bank’s market strategists said in a note Monday that they remain bullish on stocks despite “upward pressure on yields” and “mini ‘bubble’ areas such as SPACs, IPOs, bitcoin, and hydrogen.” Major stock benchmarks — the S&P 500
SPX,
+0.26%
,
Dow Jones Industrial Average
DJIA,
+0.31%

and Nasdaq Composite
COMP,
-0.20%

— were mixed in trading Monday afternoon, as the Taliban takeover of Afghanistan was one of the factors that weighed on sentiment, but the indexes remained near record highs. 

“Moderately higher yields shouldn’t challenge equity valuations,” the JPMorgan strategists said in the report. “Our preference for value stocks would provide a cushion as they would likely outperform in a rising yield environment.”

A poll of JPMorgan clients last week found that 48% of investors expect the S&P 500 to rise to 4,600 at the end of this year, with 26% expecting the index to be trading at 4,400, the report shows. The index closed up 0.3% Monday at around 4,479.

As for bonds, the yield on the 10-year Treasury note
TMUBMUSD10Y,
1.275%
,
which closed as low as 1.17% in early August, was trading around 1.26% on Monday afternoon. Bond yields and prices move in opposite directions.

See: Treasury yields retreat as China data, Afghanistan fall sour market sentiment

“We continue to believe that bond yields are too low and recommend aggressive bond underweights and value equity overweights in our trade recommendations,” the JPMorgan analysts said. 

They estimated that yields of the “Global Agg” bond index could rise nearly 0.50 percentage points this year amid a deterioration in the global balance between demand and supply.

While “mechanically higher real yields would shrink the equity risk premium,” they wrote that “one needs to factor in large real yield increases of more than 100bp from current levels to start becoming concerned about equity valuations.”

Meanwhile, value stocks, as measured by the Russell 1000 Value index,
RLV,
+0.04%

have also risen from this month’s closing low in early August, FactSet data show. The gauge was up by less than 0.1% Monday afternoon, while the Russell 1000 Growth index
RLG,
+0.20%

was up 0.2% on the day.

The JPMorgan strategists said they are particularly bullish on cyclicals and value stocks, partly because of the strong earnings that companies have reported for the second quarter as well as “signs of receding risk from the delta variant” of the coronavirus in the U.S.

“On the COVID-19 delta variant we have argued that low mortality in vaccinated countries should help investors look through this—likely last—wave,” they wrote. “It appears that investors are waiting for the inflection in U.S. cases, and we believe this is days away.”

While the strategists view the delta wave as an “overstated risk,” they expect an “amplification of geopolitical and political risks” next year, according to the report. 

See: Biden to give speech on Afghanistan after country’s government collapses

Other market concerns include sectors with “bubble-like behavior,” the JPMorgan strategists said, citing equities tied to COVID-19 lockdowns, renewable energy, electrical vehicles and crypto, as well as “hypergrowth” and innovation stocks.

“We believe that there will be another leg lower in sectors that exhibited bubble-like behavior since the onset of the pandemic,” they said. “But we don’t think these segments are significant enough to destabilize the whole market.”

What's your reaction?

Excited
0
Happy
0
In Love
0
Not Sure
0
Silly
0

You may also like

Leave a reply

Your email address will not be published. Required fields are marked *

More in:Latest News