JP Morgan: US Treasury yields nearing the 5% "warning line" could lead to a 5%-8% correction in the stock market.

Grace Peters, the global investment strategy head at JPMorgan Private Bank, stated that rising bond yields pose a significant risk to global stock markets, with September historically being a weak month for U.S. stocks. Peters believes there is still room for further increases in both U.S. and European stock markets this year, but she cautioned that a pullback of 5% to 8% may occur before risk events such as the November U.S. midterm elections. However, she considers this a healthy profit-taking phase rather than a structural collapse. U.S. bond yields are nearing the 5% warning line, which may lead to knee-jerk selling in the stock market. The increase in bond yields has become a central concern for stock investors. Influenced by worries that the situation in Iran and tariff policies could increase inflation, the yield on the 10-year U.S. Treasury bond has risen to 4.8%, approaching the 5% threshold, which is typically seen as bearish for the stock market, while the 30-year Treasury yield is at a 19-year high. Torsten Slok, the chief economist at Apollo Global Management, stated on Wednesday that U.S. Treasury yields could rise further, but he emphasized that this upward pressure is primarily driven by the war in Iran and tariff policies, rather than by the state of U.S. fiscal health. Slok noted that market concerns about U.S. policy are actually lower than those regarding Japan and Germany. Meanwhile, market speculation is growing that the Federal Reserve may be compelled to raise interest rates, which could push yields back to levels before U.S. Treasury Secretary Janet Yellen expanded bond buybacks to lower long-term debt costs. Data shows that the market-implied probability of an interest rate hike at the September meeting has risen to 69%. Peters from JPMorgan stated, The 5% threshold will have a psychological impact, and I think the stock market may react with a knee-jerk response to it. Especially considering the seasonal factors in September, the midterm elections, and that the catalytic effects of the second-quarter earnings season have already passed. Regarding profits, Peters mentioned that the trends of 30% profit growth for U.S. companies and approximately 15% growth for European companies in the second quarter are not sustainable, and she expects the growth rate to slow down. However, she emphasized that the breadth of this profit expansioncontributing from financial, industrial, and utility sectorsreflects a healthier market structure than one driven solely by technology. Signs of cooling in the housing and automobile markets are beginning to appear, but the outlook for AI remains bright? The rise in yields is having a significant impact on the most sensitive sectors of the U.S. economy, with the housing market and automobile industry both feeling the pressure. Slok wrote in his report that the median U.S. home price has reached $400,000, while most American households can only afford homes priced around $300,000. The raised barrier to homeownership has pushed the median age of first-time homebuyers from 30 in 2008 to 40 now. At the same time, the delinquency rate for multi-family housing has reached its highest level since 2004, even exceeding the peak seen after the global financial crisis. Slok stated, Interest rates pose a constraint on the housing market, but not necessarily on the AI sector. This assessment aligns with JPMorgan's sector preferences. Peters listed utilities, finance, and technology as her top picks. She noted that utilities not only play a role in powering AI infrastructure but, more critically, that power supply constraints, similar to memory chip shortages, could become limiting factors for AI expansion. JPMorgan's core judgment remains that a supercycle of capital expenditures will drive a supercycle of profits, with the U.S. and emerging markets still being the bank's preferred stock markets, while Europe is considered neither a winner nor a loser. In Peters' view, the real mid-term test is whether large-scale investments in AI can deliver capital returnswhether for technology giants pouring in money or for end-users in various industries procuring AI services.