When it comes to broader bond and stock markets, different drivers seem more at play.

10-year U.S. Treasury yields surged further this week, within touching distance of 5%. Yet, longer-dated bond yields have been climbing since May (well before word of the conflict hit), and a confluence of factors seem to be at play:

• Growth: The U.S. economy probably grew 3% or more in the third quarter. The labor market is still humming. The consumer is still spending. And, capex around industrial policy is creating powerful tailwinds.
• Monetary policy: Because growth has been strong and inflation sticky, policymakers have resolutely signaled they intend to keep rates “higher for longer.” So while the Fed may be done (or nearly done) hiking, tightening isn’t over.
• Fiscal deficits: The U.S. Treasury has had to issue more bonds this year than expected to finance the government’s deficit. Now, as President Biden prepares to ask Congress for more funds (in the billions of dollars) to offer aid to Israel and Ukraine, this has been even more in focus. All else equal, more Treasury supply puts downward pressure on prices and upward pressure on yields.
• Washington dysfunction: The drama continues, and the House has now been without a Speaker for 17 days. That doesn’t incite much confidence for policymakers’ ability to tackle both short-term spending needs and long-term debt problems, especially as we barrel towards the November 17 budget deadline to avoid a government shutdown.
• Technical market factors: Positioning, momentum and trend-following strategies all also seem to be exacerbating the moves over the last few months.

Meanwhile, the S&P 500 is pretty much unchanged since the conflict began, and is still about 20% higher from its lows hit one year ago.

Digging deeper, valuations started to come under pressure over the summer as bond yields surged. And more recently, the start of Q3 earnings season seems to be most front of mind. It’s still early, but reports have so far been solid. Banks have been better-than-feared, and while tech has been mixed, there have been notable bright spots. In all, we think this quarter will mark a return to earnings growth after three straight quarters of contraction. That matters given that earnings tend to drive stock prices over the long term.

Piecing it all together, the market seems very much aware of the conflict in Israel and Gaza, and appears to be accounting what’s known so far. That could change if we do see material escalation, but our understanding of how broader markets have behaved around similar geopolitical events suggests that the economic backdrop and business cycle are the key dynamics to monitor.

Investment considerations: Navigating uncertainty

Markets are grappling with a lot of moving pieces, from escalating tensions in the Middle East to earnings to Fedspeak. In times like these, it can be helpful to remember the power of staying invested, especially in a diversified, goals-aligned portfolio. That approach has benefitted through countless risks and periods of volatility, and we believe it can continue to do so.

We continue to think prospects for a soft landing for the U.S. economy have grown, and higher bond yields can do some work to quell the still-too-hot clip of growth and inflation. We also believe that today’s pricing offers one of the better starting points for multi-asset investors we have seen over the last decade. We think equities offer opportunity here, with more reasonable valuations, positive seasonal trends and a more constructive earnings picture offering support. And while we can’t rule out further spikes in bond yields, today’s elevated levels seem to be compensating investors for uncertainty.

There are always risks, and your J.P. Morgan advisor is here to help you navigate what it all means for your portfolio.

All market data from FactSet and Bloomberg Finance L.P., 10/20/23.

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