The S&P 500 recorded its strongest monthly advance since November 2023 in May, even as US consumer prices remain close to 3 percent year-on-year. That contrast has prompted JPMorgan strategists, led by Mislav Matejka, to warn the recent rally may be fragile and could give way to a softer phase that resembles stagflation as trade and tariff frictions play out. CEO Jamie Dimon described inflation as the skunk at the party, saying sticky costs such as medical, construction and insurance could push borrowing costs higher and unsettle asset prices, though the bank also pointed to a projected surge in AI-related investment that might support demand for data centres and digital infrastructure.

The month of May brought a sharp contrast. Equity markets climbed, with the S&P 500 recording its best monthly advance since November 2023. At the same time, consumer prices remained near 3 percent year-on-year, a reading materially above the Federal Reserve's 2 percent target and one that JPMorgan executives say markets are underestimating.

Why JPMorgan worries

JPMorgan's equity team, headed by Mislav Matejka, signalled that the recent bounce in stocks may be fragile. The strategists warned that market participants face five headwinds for equities. They pointed to a widening gap between backwards-looking hard data and weak forward-looking consumer sentiment, the prospect of rising bond yields, and downside risk to consensus earnings-per-share estimates that the bank judged overly optimistic.

The note quantified one pressure point. At the time, the 10-year U.S. Treasury yield sat at about 4.4 percent. An Evercore ISI survey cited by the bank found that 45 percent of institutional investors believed a 10-year yield of 4.75 percent would stop stocks from rising further. Higher yields would raise borrowing costs and reprice risk, the strategists said, putting pressure on valuations that had helped power the recent rally.

Jamie Dimon, JPMorgan's chief executive, has framed inflation as the central risk to the economic outlook. He said that sticky components of inflation, including medical care, construction and insurance costs, could cause prices to "slowly go up," a process that would lift interest rates and weigh on asset prices.

Dimon called inflation "the skunk at the party," a phrase he has used repeatedly to emphasise the threat.

Mastheads

The bank drew on official data to make the point. U.S. Bureau of Labor Statistics figures showed consumer prices running close to 3 percent year-on-year earlier in the year, well above the Fed's long-run goal. JPMorgan argued that investors may be underestimating how persistent those pressures could be.

Households and businesses would feel the consequences. Households face squeezed purchasing power if inflation remains elevated. Businesses could encounter higher borrowing costs and compressed earnings if the Federal Reserve responds by keeping rates higher for longer. Equity portfolios could see valuations and credit conditions deteriorate under a renewed inflation regime, the strategists warned.

Offsetting forces and internal resilience

Not all of JPMorgan's analysis was bearish. The bank identified important offsets that could support growth and corporate investment. One of the largest is a projected surge in AI-related capital spending. JPMorgan forecasts that spending will rise from $450 billion in 2025 to $725 billion in 2026. The bank said that rise would bolster demand for data centres and digital infrastructure, creating a notable macro tailwind for firms exposed to that investment cycle.

JPMorgan also pointed to its own recent performance as evidence of corporate resilience. The bank reported $185.6 billion in revenue for 2025, $57.0 billion in net income, and $3.3 trillion deployed in credit and capital globally. Those figures were presented to show that major financial institutions and large corporates have capacity to absorb some shocks, even if higher rates bite at margins elsewhere.

Market commentary from the firm suggested defensive positioning. JPMorgan advised that large-cap stocks could offer relative safety during periods of volatility, given their balance-sheet strength and earnings durability. The bank also signalled an appetite for technical innovation in market plumbing. It highlighted a tokenised Treasury settlement on the XRP Ledger linked to Ripple and Mastercard as an example of infrastructure experimentation aimed at improving settlement efficiency.

There is some divergence in tone across JPMorgan's internal commentary. Certain strategist notes emphasised downside macro risks and the prospect of a stagflation-like scenario, while other pieces treated energy-driven macro risks as milder and stressed defensive allocations and technological offsets. The bank's overall message was therefore nuanced: inflation is the dominant risk, but powerful investment trends and corporate balance-sheet strength could blunt the impact.

One practical sourcing gap is worth noting. While the user's briefing referenced an attribution to a figure named Peters, none of the sources reviewed supplied commentary from a JPMorgan spokesperson by that name.

The voices in the material are JPMorgan strategists led by Mislav Matejka and CEO Jamie Dimon, alongside external data such as the U.S. Bureau of Labor Statistics and an Evercore ISI survey.

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JPMorgan projects AI-related capital spending will rise to $725 billion in 2026, a development the bank says could materially offset inflationary pressure on corporate earnings.

This article was created with AI assistance.