U.S Stock Rally at Risk From Stagflation, Warn JPMorgan Strategists

JPMorgan Chase & Co. strategists are warning that the summer months may pose significant challenges for the S&P 500, as a combination of rising prices and slowing U.S. economic growth could threaten the index’s recent gains. In a research note led by Mislav Matejka, the team expressed concerns that the rally seen in recent weeks might not last, with market conditions potentially resembling a “stagflationary” environment—a troubling mix of stagnant economic activity and elevated inflation.

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According to the strategists, the short-term outlook for equities is clouded by two major concerns: the persistence of inflationary pressures and the ongoing instability surrounding U.S. trade relations. They noted that despite recent optimism, the full impact of tariffs and trade disruptions may have been underestimated. “The current tariffs picture is worse than most thought at the start of the year,” the team observed, implying that markets have yet to fully price in the damage from heightened trade barriers.

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This cautious stance comes on the heels of a strong performance for the U.S. equity market. The S&P 500 recently closed out its best monthly gain since 2023, offering investors a temporary reprieve from earlier volatility.

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However, concerns about the durability of the rally are resurfacing as geopolitical tensions reemerge and economic data continues to show signs of strain. While the S&P 500 has risen 0.5% so far this year, it still trails behind European and Asian markets, which have outperformed U.S. stocks amid growing optimism abroad.

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The JPMorgan strategists emphasized that the risk of stagflation—where economic growth remains weak but inflation stays elevated—could act as a major headwind for U.S. stocks in the coming months.

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This scenario is particularly damaging for equity markets, as it typically results in falling corporate earnings and tighter financial conditions. Against this backdrop, JPMorgan is recommending a pivot away from U.S. equities in favor of international markets, where they see better valuation opportunities and less vulnerability to domestic policy risks.

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More specifically, the team remains constructive on emerging market equities, particularly Chinese technology stocks, which they believe are poised for a rebound. The strategists argue that global investors have become overly cautious about China, and that the sector could outperform as regulatory pressures ease and the country continues to stimulate its economy.

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In contrast to JPMorgan’s bearish view, analysts at Goldman Sachs offer a more balanced perspective. A team led by David Kostin believes that the S&P 500 is currently trading near its fair value and that the market’s valuation metrics are unlikely to shift significantly over the next year. While they acknowledge some headwinds, Goldman’s outlook suggests that the risks to U.S. equities from rising bond yields or economic softening are manageable, and that the index is unlikely to face dramatic downside pressure in the near term.

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Similarly, Morgan Stanley strategist Michael Wilson is maintaining a bullish outlook on corporate earnings. Despite the macroeconomic challenges, he believes that U.S. companies are in a stronger position than many assume. In his view, valuations may have already hit their lows, and there is potential for growth in earnings to support stock prices going forward.

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The divide in opinion among Wall Street’s top strategists highlights the current uncertainty hanging over the market. On one hand, rising costs, sluggish growth, and global trade issues suggest caution. On the other hand, healthy corporate balance sheets and resilient consumer spending offer a reason for optimism.

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Investors are now navigating a market environment shaped by competing narratives. On one side is the fear that stagflation and global instability could derail the rally that began earlier this year. On the other is the hope that strong earnings, stable interest rates, and international growth could keep markets afloat.

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Ultimately, how the summer unfolds will depend heavily on the trajectory of inflation, progress in trade negotiations, and upcoming economic indicators such as employment data and manufacturing output. For now, JPMorgan’s advice is clear: temper expectations for U.S. stocks, shift focus overseas, and remain alert to the risks that could challenge the recent momentum in markets.

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