JPMorgan Chase warns: The US economy is increasingly approaching stagflation, and "five headwinds" will drag down US stocks!

Despite the global market being "overshadowed" by Trump's erratic tariff policies, May was still a strong month for the US stock market, with the S&P 500 Index achieving its best monthly performance since November 2023. However, JPMorgan Chase is not confident that this rally can be sustained.

The bank believes that the resurgence of global trade tensions, weakening consumer confidence, and the growing discussion around "stagflation"are all signs that the rally in US stocks this summer will slow down.

In a report on Monday, JPMorgan Chase's equity strategists, led by Mislav Matejka, wrote: "After the recent rebound, we believe weakness will follow, which may resemble the stagflation period, during which trade negotiations are expected to conclude."

JPMorgan Chase CEO Jamie Dimon also recently pointed out the risk of stagflation. In the eyes of economists, stagflation could be more severe than a recession. This is because, due to concerns about rising inflation, central banks cannot stimulate economic growth by lowering interest rates. Coincidentally, Torsten Sløk, Chief Economist at Apollo, also believes that the groundwork for stagflation has been laid.

In its latest report, JPMorgan Chase pointed out five unfavourable factors in the stock market that investors should be aware of.

1. The gap between soft data and hard data

Although recent inflation data has started to decline, approaching the US Fed's 2% target, consumer confidence has remained weak, indicating a discrepancy between forward-looking economic data and forward-looking sentiment.

Many on Wall Street are also skeptical about whether the cooling of inflation will become a lasting trend. Strategists suspect that inflation may rise in the second half of the year as the impact of tariffs on the economy becomes more fully felt. JPMorgan Chase believes that after consumers and businesses made early purchases at the beginning of the year, there is still room for the weak data to deteriorate further.

"The past practice of placing orders in advance on the eve of tariff hikes may have paid off, but with purchasing power being squeezed, consumers' purchasing power will weaken. Even with a significant pullback, the current tariff situation is worse than what most people expected at the beginning of the year," the bank wrote.

2. Bond yields may rebound slowly

Heightened concerns about inflation, coupled with a widening deficit, may push up bond yields. Moody's downgrade of the US debt rating and Trump's tax bill (expected to increase the deficit by trillions of US dollars) have caused bond yields to surge in recent weeks, and concerns about the deficit may also lead to a weakening of the US dollar.

The yield on 10-year US Treasuries is around 4.4%, lower than its recent peak. However, JPMorgan Chase believes that bond yields may rise again due to inflationary pressures. A survey conducted by Evercore ISI among institutional investors showed that 45% of respondents said the stock market would stop rising if the 10-year Treasury yield reached 4.75%.

3. Earnings Downgrades

Looking ahead, JPMorgan Chase suggests that Wall Street's consensus on earnings-per-share (EPS) growth appears overly optimistic. The market generally expects a 10% increase this year and a 14% increase next year, but the bank views these expectations as too aggressive.

In JPMorgan Chase's view, EPS will face negative revisions. Higher input costs and interest expenses may erode profit margins. Historically, earnings growth for S&P 500 companies has required GDP growth exceeding 2%, which is unlikely during periods of stagflation.

4. US Stocks Remain Expensive

The forward price-to-earnings (P/E) ratio for the S&P 500 is 22, which is high and may not be sustainable in the long term, considering inflation and tariff concerns.

Amid tariff worries disrupting the S&P 500, international stock markets have emerged as a bright spot, and JPMorgan Chase believes their strength may persist. Although US stocks typically perform best during periods of market volatility, the bank believes that stagflationary pressures may allow international stock markets to shine.

The bank wrote, "If the market weakens again, the US typically outperforms other regions during risk-off periods, but this time, tech stocks and the US dollar may not be 'safe' havens."

5. US Households Hold Record Stocks

Retail investors have recently been buying the dip and flooding into the stock market, but their enthusiasm may be a contrarian signal for stocks, as it is often seen as a sign of an overbought market. Currently, US households hold stocks close to 30% of their total assets, higher than the peak in 2000 before the dot-com bubble burst.