JPMorgan: Stabilization of bond yields may end valuation compression, combined with accelerating earnings, stock market expected to rise through the end of the year

According to Zhixin Finance APP, JPMorgan strategist Mislav Matejka stated that if global bond yields can stabilize, it could end the compression of stock valuations and help the stock market sustain its recovery through the end of the year.

JPMorgan believes that the recent surge in the 10-year US Treasury yield has been overdone — the yield surpassed 5% at the end of September for the first time in twenty years, with a peak around 5.3%. The bank pointed out that movements in federal funds futures can almost fully explain this year’s rise in the 10-year yield; as the repricing of short-term rates is largely complete, much of the upward pressure on long-term rates is likely to ease as well.

The spike in yields has taken a significant toll on stock valuations. Matejka wrote in a recent report that during the most intense phase of the selloff, the 12-month forward price-to-earnings ratio for both the S&P 500 and the MSCI Global Index compressed by about 3 points. The current forward P/E ratio for the S&P 500 stands at 19.1, down from 21.7 at the start of the year. If yields stabilize, this valuation compression may not need to continue.

The early results from third-quarter earnings reports are providing additional support. Among companies that have reported so far, 78% of US firms and 60% of European firms have exceeded consensus EPS expectations. The proportion of companies globally experiencing accelerating earnings growth is near historical highs, increasing the likelihood of a more sustainable market upcycle.

Declining yields will also ease the pressure on AI capital expenditure financing and consumer balance sheets, broadening market participation from mega-cap tech stocks (MAGS) to other sectors. The bank advocates that if both bond yields and corporate earnings deliver as expected, stocks should have room to perform before the end of the year.