JPMorgan Asset Management, a unit of JPMorgan Chase, anticipates robust global economic expansion momentum will persist into the third quarter of 2026, driven primarily by capital investment in artificial intelligence (AI), government fiscal stimulus, and energy dynamics in the Middle East.
The firm expects the US Federal Reserve will refrain from raising interest rates for the remainder of this year, with a single rate cut anticipated in the latter half of 2025. It holds a positive outlook for US, Japanese, and emerging market equities, while maintaining a relatively neutral stance on European stocks due to perceived downside risks to the region's economic growth.
Economic Growth Outlook
Sylvia Sheng, Chief Portfolio Manager for Multi-Asset Solutions at JPMorgan Asset Management, stated the firm's base case is for the US economy to grow at a healthy 2% pace over the next 12 months. Recent composite Purchasing Managers' Index (PMI) data suggests global growth will remain at trend levels, despite a weak economic outlook in Europe.
Sheng identified the AI capital expenditure cycle as a primary growth driver. Global capital expenditure appears set to re-accelerate in the first half of 2026, with expectations that such spending will extend beyond the technology sector. Economic activity in Asian regions directly linked to AI and semiconductor demand is rebounding, contributing to an upturn in the global trade cycle. Asia's central role in the AI supply chain places it in a particularly advantageous position.
Commodity and Inflation Perspectives
The global economy has weathered the energy crisis relatively well, partly because financial conditions have not tightened as severely as during previous oil crises. Sylvia Sheng forecasts Brent crude oil prices will trend towards $80 per barrel or lower by year-end. This is attributed to oil shipments from the Strait of Hormuz "likely entering a market that was already oversupplied before the war broke out." Marginally, inventory rebuilding and a normalization of China's crude imports could provide some support to oil prices. Consequently, despite upside risks to US inflation, the firm believes the impact of oil prices on core inflation should remain relatively moderate.
"Additionally, we are closely monitoring emerging labor market imbalances and the extent to which AI demand could create structural upward pressure on prices," she added.
Central Bank Policy Expectations
JPMorgan Asset Management predicts central banks will likely maintain a slightly hawkish rhetoric but exercise restraint on actual rate hikes. It forecasts the Federal Reserve will keep interest rates unchanged in 2026, implementing a single cut in the second half of 2027. The Bank of England and the European Central Bank are expected to hold rates steady for the rest of this year. However, the Bank of Japan is anticipated to continue its gradual normalization process, with one rate hike each expected later in 2026 and in 2027.
Sheng noted that current pricing in the US interest rate market seems excessively hawkish. "But to be more convinced of this view, we need more information on Federal Reserve policy dynamics under its new leadership," she said, referring to Kevin Warsh.
Equity Market Views
Sylvia Sheng indicated that despite elevated US valuations, strong earnings per share (EPS) growth in the US and emerging markets is sufficient to justify an overweight allocation. In contrast, parts of Europe exhibit weak profit growth trends alongside high price-to-earnings ratios.
The recent US earnings season posted its fastest growth rate since 2021. The firm remains optimistic about US equities over the next 12 months, with the primary driver being earnings growth, while the price-to-earnings multiple is expected to remain largely stable around 21 times.
In the Asia-Pacific region, JPMorgan Asset Management favors emerging markets, expecting AI capital expenditure to drive profit growth amid lower valuations. It also maintains a positive view on Japanese equities, anticipating a return of inflation and ongoing corporate governance reforms.
Fixed Income and Currency Stance
Sheng further noted that risk tolerance is more favorable in the interest rate sector than in foreign exchange. European long-dated bonds appear attractive due to valuations, as Eurozone growth is expected to lag behind other major regions and markets have already priced in European Central Bank policy tightening. "Overall, the 12-month return prospects are quite attractive," she stated.
In sovereign bonds, the firm prefers UK Gilts over US Treasuries, as weak UK growth prospects are likely to keep the Bank of England from raising rates. "We are currently neutral on US Treasuries," she said, with the 10-year Treasury yield within the firm's expected range of 4.20%-4.75%.
Regarding currencies, the firm also holds a neutral stance on the US dollar, which has been range-bound over the past quarter. A re-acceleration of the US economy, coupled with the potential for a more hawkish Fed, poses risks to expectations of sustained dollar weakness in the short term.
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