Beware of the "September curse"! JPMorgan warns that if US Treasury yields break 5%, US stocks may see a healthy correction of 5%-8%.

U.S. Treasury yields are approaching the key 5% threshold, rapidly intensifying short-term risks in global stock markets.

JPMorgan Private Bank's Global Head of Investment Strategy, Grace Peters, warns that if the 10-year U.S. Treasury yield moves closer to 5%, it could trigger a “knee-jerk reaction” in equities, with U.S. stocks potentially facing a correction pressure of 5% to 8%. At present, the 10-year Treasury yield has risen to 4.8%, while the 30-year yield has reached a 19-year high.

However, Peters has not turned pessimistic as a result. In her view, even if a 5% to 8% pullback occurs, it is more likely to be a healthy correction rather than a structural market collapse; for the full year, she remains optimistic about the performance of U.S. and European equities.

Seasonal Weakness in September and Looming Elections Heighten Market Sensitivity

According to Bloomberg, Peters stated in an interview that the 5% yield level holds significant psychological importance. Once the 10-year U.S. Treasury yield rises into the 5% to 5.25% range, the stock market could see a clear and immediate reaction.

The rapid surge in Treasury yields this round is mainly driven by intensifying inflation concerns. Rising oil prices have heightened fears of a resurgence in inflation and raised expectations of renewed rate hikes by policymakers, pushing long-term Treasury yields back to previous levels.

Peters believes the current market window is particularly sensitive. Historically, September has been a seasonally weak month for the S&P 500, earnings-related catalysts from Q2 are fading, and the upcoming U.S. midterm elections may further amplify uncertainty in the market.

Earnings Growth May Slow, but Market Foundation Is More Solid

Compared to yield pressures, corporate earnings remain a major support for Peters’ positive outlook for the full year.

She points out that U.S. corporate earnings in Q2 grew by about 30%, while Europe saw around 15% growth. This pace is unlikely to be sustained for long and will most likely slow gradually in the future. However, it's important to note that this round of earnings growth is not entirely reliant on tech stocks; financials, industrials, and utilities have also contributed, meaning the foundation for market gains is broader than in the past.

JPMorgan’s core view remains unchanged: a “super cycle” of capital expenditure is poised to drive a “super cycle” in earnings. In terms of regional allocation, the firm still places U.S. equities as its top choice and remains bullish on emerging markets; it maintains a neutral stance on Europe.

AI Boom Enters the Return Verification Phase

Peters considers utilities to be among her most favored sectors, on par with financials and technology.

In her view, the expansion of AI infrastructure is pushing electricity demand to new heights, from which utilities are likely to benefit directly. However, electricity supply bottlenecks and memory chip shortages may become hard constraints on AI’s expansion.

A bigger question lies in whether AI’s massive capital expenditures can ultimately translate into sufficiently high investment returns. Peters believes this will become AI’s true “mid-term test” — not only whether tech companies can profit from their investments, but also whether enterprises across industries that purchase AI services can achieve adequate economic returns.

Therefore, in JPMorgan’s view, the main risk for the current market is not that the AI story will be disproved, but rather that a combination of high valuations, high yields, and slowing earnings growth could trigger a temporary valuation reset.