Global stock markets are capable of weathering the impact of interest rate hikes, according to JPMorgan, provided the Federal Reserve maintains a gradual pace of tightening within an environment characterized by robust earnings growth and stable inflation expectations. A team of strategists led by Mislav Matejka noted that the positive correlation between stocks and yields is likely to persist, although the margin for error is narrowing; the risk of this relationship turning negative escalates when the US 10-year Treasury yield climbs to approximately 5% to 5.5%.

The strategists believe that equities have already priced in the upward movement in Treasury yields, given that the recent rise is driven by improved economic activity and earnings upgrades, with real interest rates moving higher rather than a surge in long-term inflation expectations. The team acknowledged that short-term oil price movements could determine risk appetite, with seasonal factors remaining weak and investors harboring concerns over inflation, yet cautioned against over-extrapolating from such conditions; third-quarter earnings releases beginning in October are expected to reassure the market.

In a separate research note, a JPMorgan strategy team led by Dubravko Lakos-Bujas indicated that stocks could cope if the Fed initiates a mild rate-hiking cycle, one that merely reverses last year's "preventive cuts." However, should inflation re-accelerate and markets begin pricing in a broader cycle of rate increases, equities would face "significant downside risks," though this scenario is not the strategists' base case.