JPMorgan: Market Overestimates Risk of Higher Interest Rates, Low Volatility Stocks Provide a Window for Positioning

The market's concerns about central bank rate hikes might be overblown — this is creating opportunities for defensive stocks that have long been neglected.

JPMorgan strategist Mislav Matejka and his team pointed out in their latest report that investors are generally worried that the energy price shock triggered by an Iran war will trigger a new round of significant rate hikes, similar to the situation following the Russia-Ukraine conflict in 2022. However, the team believes that there are essential differences between the current situation and the previous one — both parties involved in the conflict ultimately intend to seek an exit, and bond yields and oil prices are expected to decrease in the next six to twelve months, with盈利前景预计将保持强劲, and stagflation is not the baseline scenario for the second half of the year.

On the employment and salary front, the expected weakening of employment and the slowdown in salary growth in the United States will make it difficult for a "wages-price spiral stagflation" to take shape. Current market pricing indicates that the Federal Reserve will raise rates once before March 2027, and the European Central Bank will raise rates twice before the end of this year — while JPMorgan believes that this pricing is already too aggressive.

Against this backdrop, the team is optimistic about the allocation value of low-volatility stocks, which include essential consumer goods, utilities, insurance, and some industrial stocks. These types of stocks have been sidelined for a long time in an AI-driven market trend; the cyclical stock performance relative to defensive stocks indicator tracked by Goldman Sachs has fallen back to an 18-year low; and the recent sharp rise in global interest rates has further weakened their appeal as a substitute for bonds, with their performance being "extremely poor" in recent months.

JPMorgan believes that low-volatility stocks have room for upward repair regardless of interest rate movements: if the 10-year US Treasury bond yield continues to climb to around 5%, these stocks are expected to break the inverse correlation with interest rates and show relative resistance to declines; if interest rates fall, they will benefit directly and repeat the excess return situation before the Iran war.

Morgan Stanley strategist Mike Wilson holds a similar view. He said that if yields and oil prices can fall, it will help break the current market's high concentration on a few tech stocks and promote a broader rotation of sectors. He also emphasized that as long as the earnings recovery trend continues, higher interest rates themselves do not pose a threat to the stock market — "The stock market can withstand higher yields, on the premise that the main driver of the interest rate increase is economic growth, rather than the central bank's policy stance turning hawkish."