Stock Market Outlook: JPMorgan Sees 5 Headwinds As Stagflation Risk Rises

May was a strong month for the market, with the S&P 500 marking its best monthly performance since November 2023, but JPMorgan isn’t confident that the winning streak will continue.

The bank sees renewed US-China trade tensions, softening consumer sentiment, and growing chatter around the “S-word” — stagflation — as signs that the stock market’s momentum will slow this summer.

“Post the recent bounce, we think softer leg is in store next, which could resemble a bit of a stagflationary episode, and during which trade negotiations play out,” JPMorgan equity strategists, led by Mislav Matejka, wrote in a note on Monday.

JPMorgan CEO Jamie Dimon also recently flagged the risk of stagflation, which economists have said can be worse than a recession. That’s because central bankers would be unable to stimulate growth by lowering interest rates due to fears of exacerbating inflation. Torsten Sløk, Apollo’s chief economist, also thinks the groundwork for stagflation has already been laid.

JPMorgan identified five headwinds for stocks that investors should be on the lookout for.

1. The gap between soft and hard data

   While recent inflation prints have started to come down closer to the Fed’s 2% target, consumer sentiment has been weak, indicating a disparity between backwards-looking economic data and forward-looking sentiment.

   Many on Wall Street are also skeptical that cooler inflation is a durable trend, and strategists suspect inflation is likely to pick up in the back half of this year as tariffs are felt in the economy more fully. JPMorgan believes there’s room for the soft data to deteriorate further after consumers and businesses front-loaded purchases in the beginning of the year.

   “Past front-loading of orders in the run-up to tariffs is likely to have a payback, there will be some weakening in consumer due to squeeze in purchasing power, and even with dramatic backpedalling, the current tariffs picture is worse than most thought at the start of the year,” the bank wrote.

2. Bond yields could creep back up

   Increased inflation concerns, combined with the growing deficit, could send bond yields rising and stall a rally. The Moody’s downgrade of the US debt and Trump’s tax bill, which is projected to add trillions to the deficit, have caused bond yields to spike in recent weeks, while deficit concerns could also lead to a weaker US dollar.

   The 10-year US Treasury yield is about 4.4%, down from recent spikes, but JPMorgan believes it’s likely that bond yields move up again due to inflationary pressures. According to a survey of institutional investors conducted by Evercore ISI, 45% of respondents said a 10-year yield of 4.75% would halt stock market gains.

3. Downwards earnings revisions

   Looking forward, the Wall Street consensus on earnings-per-share growth seems overly optimistic, JPMorgan said. Consensus estimates project 10% growth this year and 14% growth next year, which the bank believes is too aggressive. Expect negative EPS revisions to materialize, the bank predicts. Higher input costs and interest costs are likely to eat into profit margins. Historically, S&P 500 earnings growth has required above 2% GDP growth, which is unlikely in a period of stagflation.

4. US stocks remain expensive

   At 22x, the forward price-to-earnings of the S&P 500 is elevated, which might not be sustainable for the long term in light of inflation and tariff concerns.

   International stocks were a bright spot in the market as tariff concerns roiled the S&P 500, and JPMorgan thinks international strength could continue. While US stocks have typically been the best performers in times of market volatility, the bank believes stagflationary pressures could allow international stocks to shine.

   “If markets relapse into weakness, the US has typically held up better than other regions during risk-off periods, but this time around Tech and USD might not be the ‘safe’ havens,” the bank wrote.

5. US households hold record amounts of stock

   Retail investors have been flooding the market recently as they buy the dip, but retail enthusiasm could be a contrarian signal for the stock market, as it’s often seen as a sign that the market is overbought. Right now, US households’ stock ownership is approaching 30% of total assets, higher than the peak in 2000 before the dot-com crash.