MW JPMorgan has a new way of forecasting the stock market - and there's a surprising finding

By Steve Goldstein

Good valuation for the S&P 500 turns out to be a bad sign for future returns

There was a pause on Wednesday as investors shift from war speculation to considerations over interest rates and tariffs. A raft of economic data over the next two days could shift markets.

Granted, it's not just economic data that moves markets. Strategists at JPMorgan led by Nikolaos Panigirtzoglou say they've created a model to forecast the direction over the S&P 500 SPX over a six-month horizon. What it does is look at six signals - volume, value, positioning, flows, economic momentum and price momentum - relative to their own history, or what in statistics is called a z-score.

They trained the model on data up to late 2022, and then tested it on more recent numbers. The strategists say they paid more attention to the accuracy of predicting down moves, given that for equities an "always long" prediction would have been right more than 90% of the times in the test period.

Their six-month ahead prediction, for down moves, ended up being correct 76% of the time for the time periods they trained it on, and being correct 63% for the "out of sample" periods. That's actually much better than a host of competing models it tried out, which in particular struggled in forecasting down markets.

Maybe more of note was how each signal impacted the prediction. The stronger the economic momentum - proxied by the two-month change of the global manufacturing purchasing managers index - and the more trading activity, the more likely it was that the stock market would go up. When there's high levels of bullish positions, or large flows of money into stock funds vs. bonds, that's a signal of overcrowding, and suggest a higher chance of the stock market falling.

Similarly, when stock market momentum is very strong relative to the bond market, it's a warning sign.

The most unusual finding is in value - the better the valuation is, the worst it is for future returns. The strategists suggests that's because valuation often is tied to change in the 10-year Treasury yield BX:TMUBMUSD10Y, so a decline there could represent a negative signal for economic growth going forward.

As for what the model is saying right now, it's good news: it says there's a 96% chance that the stock market will rise over the next six months.

The market

U.S. stock market futures (ES00) (NQ00) rose, putting a new record high of the S&P 500 within reach. The U.S. dollar DXY fell to a three-year low.

   Key asset performance                                                Last       5d       1m      YTD     1y 
   S&P 500                                                              6092.16    1.86%    3.46%   3.58%   11.21% 
   Nasdaq Composite                                                     19,973.55  2.19%    4.57%   3.43%   12.18% 
   10-year Treasury                                                     4.274      -12.20   -15.00  -30.20  -1.70 
   Gold                                                                 3352.1     -1.01%   2.06%   27.01%  45.13% 
   Oil                                                                  65.14      -10.90%  5.30%   -9.36%  -19.46% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

A busy economics calendar including weekly jobless claims, durable-goods orders, a revised look at first-quarter GDP and advanced trade data for May.

The Wall Street Journal said President Donald Trump was considering naming a successor to Fed Chair Jerome Powell in September or October, and possibly as early as this summer.

Micron Technology $(MU)$ reported booming sales and earnings as it benefits from artificial intelligence demand.

Bumble $(BMBL)$ said it's going to cut 30% of its employees.

Shell $(SHEL)$ denied that it made an approach for rival oil giant BP $(BP)$, and in doing sod it prevents any bid for at least six months under U.K. stock-market rules.

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The chart

An interesting chart from the Amundi Investment Institute, which is part of the giant French asset manager, in which it plots currency performance since April 2 - so-called Liberation Day - vs. each country's net international investment position, the gap between a nation's stock of foreign assets and a foreigner's stock of that nation's assets. "The U.S. is coming to a point where the cost of new debt no longer justifies itself. Rising U.S. interest rates now reflect rising fiscal risks rather than sound economic fundamentals," the firm says in its mid-year outlook. Capital repatriation or international diversification may accelerate from here, the firm adds.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
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   GME     GameStop 
   AMD     Advanced Micro Devices 
   MU      Micron Technology 
   PLTR    Palantir Technologies 
   CRCL    Circle Internet Group 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 
   SMCI    Super Micro Computer 

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-Steve Goldstein

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June 26, 2025 06:58 ET (10:58 GMT)

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