Equities should deliver positive returns in the first half of 2026, according to JPMorgan, as easing inflation, steady growth and improving earnings offset lingering concerns over the US labour market.
The bank says December’s consolidation has cleared the ground for gains. The S&P 500 ended 2025 below its level before the Federal Reserve’s December rate cut, but JPMorgan argues that this has improved the risk-reward going into the new year .
The core of the argument is that the growth and inflation trade-off is improving from both sides. Inflation is expected to continue falling, helped by subdued oil prices, softer wage growth and the possibility that tariffs are diluted. At the same time, economic activity is being supported by fiscal stimulus, especially in Europe, and by signs of stabilisation in China.
Bond yields are expected to remain well-behaved. JPMorgan believes this will allow central banks to stay on a broadly dovish path, even if the Federal Reserve moves cautiously because of mixed signals from the labour market.
US still expensive
JPMorgan remains cautious on US valuations. The S&P 500 is trading at around 23 times forward earnings, which the bank describes as expensive in a historical context. Earnings remain dominated by the largest technology stocks, but the gap between the so-called Magnificent Seven and the rest of the market is narrowing.
The bank stays long US growth and large caps, but says broader leadership will likely require the Fed to turn more aggressively dovish. Investor positioning is already elevated and the labour market remains a wildcard, with payroll growth slowing even as jobless claims remain contained.
Europe moves to the fore
The clearest conviction is in Europe. JPMorgan is overweight Eurozone equities and reiterates its bullish call on the Euro Stoxx 50 after months of sideways trading.
The bank argues that the region’s earnings outlook is finally turning. Eurozone profits fell for a third consecutive year in 2025, but JPMorgan expects a rebound in 2026 as German fiscal stimulus gains traction and credit growth improves following European Central Bank rate cuts.
Valuations are a key part of the case. Eurozone equities are trading at close to record discounts relative to the US, even after recent gains. JPMorgan believes this gap offers an attractive entry point, particularly as trade headwinds fade and domestic demand improves.
France stands out within Europe. It is the largest market in the Eurozone but has lagged badly for two years. JPMorgan says this underperformance looks overdone and sees scope for a catch-up, especially if activity improves and political risk recedes.
Emerging markets back in favour
JPMorgan is also overweight emerging markets relative to developed markets. After years of underperformance, the bank believes the backdrop is turning more supportive.
Many emerging market central banks are still expected to cut rates, currencies are no longer under the same pressure from a strong dollar and policy support in China is increasing. Valuations are low and positioning remains light.
Within emerging markets, JPMorgan favours China technology, Korea and parts of the Chinese domestic cyclical upswing, including A-shares. It also notes that improving activity in China could benefit indirect plays, particularly in Europe.
Japan still solid, but risks rising
Japan’s fundamentals remain strong. Earnings yields relative to bond yields are attractive, corporate governance reforms continue and buybacks are running at record levels. Wage growth is improving and further fiscal support is likely.
However, JPMorgan flags growing risks. Valuations are fuller after a strong run in 2025, a weaker yen could reduce returns for overseas investors and bond yields could rise more sharply. The bank still sees scope for gains but is more selective, favouring banks as yield gaps widen.
UK cheap, but lacking catalysts
The UK remains neutral. JPMorgan highlights its record valuation discount and the highest dividend yield among major markets, but sees few near-term catalysts. The market is less exposed to trade risks but also lacks clear drivers for outperformance.
Sector calls sharpen
At sector level, JPMorgan continues to avoid energy. The bank argues that oil prices are likely to remain under pressure due to excess supply and says energy equities are trading above levels implied by the oil price.
It is more positive on basic resources, having upgraded the sector earlier as part of its China recovery view. Miners still trade at a discount to spot prices, offering upside if Chinese demand improves.
Banks remain attractive fundamentally, particularly in Europe, although JPMorgan notes that earnings momentum is peaking after a strong rally. Healthcare screens as cheap, while parts of defence, utilities and insurance are seen as vulnerable to rotation after strong performance.