Treasury yields are brushing up against a critical 5% threshold, and that is rapidly cranking up the near-term risk for global equities.

Grace Peters, the Global Head of Investment Strategy at JPMorgan Private Bank, has issued a warning that if the 10-year Treasury yield pushes further toward 5%, it could trigger a 'knee-jerk reaction' in the stock market, potentially putting 5% to 8% of downside pressure on US equities. Right now, the 10-year yield has already climbed to 4.8%, while the 30-year yield is sitting at levels not seen in 19 years.

That said, Peters is not turning bearish. She argues that even if a 5% to 8% pullback materializes, it is more likely to be a healthy correction rather than a structural breakdown in the market. Looking at the full-year picture, she still holds a positive view on both US and European stocks.

September Weakness and Election Nerves Put Markets on Edge

In an interview with Bloomberg, Peters explained that the 5% yield level carries major psychological weight. If the 10-year Treasury yield were to move into the 5% to 5.25% range, equity markets could see a pronounced and immediate reaction.

The recent surge in Treasury yields is largely being driven by growing inflation concerns. Rising oil prices are stoking fears that inflation could make a comeback, and they are also lifting expectations that policymakers might have to resume hiking interest rates. That has pushed long-end yields back up to their previous highs.

Peters believes the current window is particularly sensitive. September has historically been a weak month for the S&P 500, the earnings catalyst from the second-quarter reporting season is starting to fade, and the approaching US midterm elections could amplify market uncertainty even further.

Earnings Growth May Cool, But the Market's Foundation Is Stronger

Compared to the pressure from yields, corporate earnings remain a key pillar of Peters' optimistic full-year outlook.

She points out that US companies posted earnings growth of roughly 30% in the second quarter, with Europe coming in at around 15%. Those kinds of growth rates are not sustainable over the long haul and are likely to gradually taper off. However, she notes that this earnings cycle is not purely dependent on tech stocks. Financials, industrials, and utilities are also contributing to the bottom line, which means the market's advance is built on a broader base than in the past.

JPMorgan's core thesis has not changed: a capital expenditure 'super-cycle' is expected to fuel an earnings 'super-cycle.' In terms of regional allocation, the bank still lists US equities as its top pick while also favoring emerging markets, with Europe remaining a neutral call.

The AI Boom Enters Its Payoff Verification Phase

Utilities are one of the sectors Peters is most bullish on, sitting alongside financials and technology.

In her view, the expansion of AI infrastructure is pushing electricity demand to new heights, which should directly benefit utilities. But at the same time, bottlenecks in power supply and shortages of memory chips could become hard constraints on AI growth.

The bigger question is whether the massive capital spending on AI will ultimately translate into sufficiently high investment returns. Peters sees this as the true 'mid-term test' for AI investing. It's not just about whether tech companies can profit from their outlays, but also whether the enterprises buying AI services across various industries can generate enough economic payoff from them.

As a result, JPMorgan believes the bigger risk for markets right now is not that the AI narrative itself gets debunked, but that the combination of high valuations, elevated yields, and decelerating earnings growth could trigger a periodic repricing of assets.