The Zhitong Finance App learned that J.P. Morgan strategist Mislav Matejka said that if global bond yields stabilize, it may end the compression in stock valuations and help the stock market continue to recover until the end of the year.
J.P. Morgan believes that the recent sharp rise in 10-year US Treasury yields is over — the yield rose above 5% for the first time in 20 years at the end of September, peaking at around 5.3%. The bank pointed out that changes in federal funds futures can explain almost all of this year's 10-year yield increase; as the repricing of short-term interest rates is largely completed, most of the upward pressure on long-term interest rates may ease.
Soaring yields have taken a heavy toll on stock valuations. Matejka wrote in a recent report that the 12-month forward price-earnings ratio of both the S&P 500 and MSCI Global Index was reduced by about 3 points during the most intense sell-off phase. The S&P 500's forward-looking price-earnings ratio is currently 19.1 times, down from 21.7 times at the beginning of the year. If yields stabilize, this valuation compression may not need to continue.
Early results from the third-quarter earnings report are providing additional support. Among the companies that have announced results, 78% of US companies and 60% of European companies have surpassed the agreed EPS expectations. The share of companies with faster profit growth worldwide is close to an all-time high, which increases the possibility that the market cycle will be more sustainable.
Lower yields will also ease the pressure on AI capital expenditure financing and consumer balance sheets, expanding the scope of market participation from very large technology stocks (MAGS). The bank argues that if bond yields and corporate profits are realized as expected, stocks should be able to perform well before the end of the year.