JPMorgan Says Oil Shock Has Not Broken the Equity Rally

A 5% Treasury yield and crude above $100 a barrel finally forced investors to pay attention. U.S. stocks slipped on Tuesday as the inflation shock from the Middle East collided with a bond market demanding more compensation for holding long-dated government debt.

The S&P 500 fell 0.4%, while the Nasdaq Composite dropped 0.8%. The 10-year Treasury yield settled around 5%, after briefly touching 5.04%, its highest level since 2023. Brent crude rose 2.9% to $108.75 a barrel, according to Associated Press data.

The pressure works through several channels. More expensive oil lifts transport, manufacturing and household costs, while higher Treasury yields raise borrowing expenses and reduce the premium investors receive for owning expensive growth stocks. Companies whose customers have less disposable income took some of the heaviest losses. Chipotle Mexican Grill fell 5.9%, Darden Restaurants lost 4.3% and Dollar Tree dropped 5.4%.

JPMorgan’s strategists are not treating the move as the start of a lasting equity unwind. The bank has urged investors not to chase the sell-off, arguing that corporate earnings remain on an upward trajectory and that the current backdrop is materially different from 2022, when aggressive monetary tightening dragged stocks lower for much of the year.

That does not make the risk theoretical. JPMorgan estimates the MSCI World index has gained about 11% this year even as government bond yields climbed roughly 80 basis points. The relationship can persist while higher yields reflect firm economic activity, but the cushion narrows as the 10-year yield approaches the 5% to 5.5% range.

Oil is the variable markets cannot easily dismiss. Brent has surged from roughly $72 a barrel before the Iran conflict, with uncertainty over tanker traffic through the Strait of Hormuz keeping a geopolitical premium embedded in prices. Refined products are an even sharper concern: JPMorgan Private Bank says diesel and jet fuel have risen far more than crude since the conflict began.

The bank expects third-quarter earnings, due from October, to provide a fresh test of whether profits can outrun discount-rate pressure. Until then, it favors using volatility to add selectively, with cyclical and value shares better positioned than the market’s most rate-sensitive growth names.