JPMorgan Sees Two Key Drivers for U.S. Stocks to Keep Climbing

A strategist team led by Lakos-Bujas at JPMorgan believes that the U.S. stock market’s “path of least resistance” continues to point toward new highs. The S&P 500’s climb back to 6,000 has been primarily driven by better-than-expected Q1 earnings results. Additionally, investors’ enthusiasm for AI-related trades has been rekindled, and the capital spending boom among major tech firms shows no signs of slowing.

In the short term, JPMorgan sees a “dual pain trade” setup in equities that could further fuel the ongoing bull market.

First, many investors who panic-sold during April’s sharp pullback are now chasing the market higher, eager to avoid missing out on the rally.

Second, there’s a widespread expectation that the 2025 equity rally will be more “diversified,” no longer dominated solely by the “Magnificent Seven” tech giants. Instead, gains may come from a broader array of sectors and geographies. European equities, for example, have recently outperformed their U.S. counterparts. Investors are reallocating capital from highly appreciated U.S. tech and quality growth names into previously underperforming regions like Europe and emerging markets, attempting to capitalize on a catch-up trade.

However, JPMorgan cautions that the so-called “U.S. exceptionalism” trade could make a comeback. With the global market still lacking a sufficient supply of high-quality assets and liquidity remaining abundant, the profitability and dominance of the Magnificent Seven remain solid. Other markets, while catching up in price, now have elevated valuations that aren't always backed by equally strong earnings. If market leadership once again concentrates in a few U.S. giants, investors who’ve rotated away could be caught off guard and forced to buy back into these names—potentially fueling another leg up in prices. This shift in market leadership could become a new tailwind for U.S. stocks.

What are the downside risks for the market?

JPMorgan highlights that the main downside risk is a significant economic slowdown in the second half of the year. Aggressive front-loading of activity due to tariff fears, lagged effects from new policies (including tariffs, immigration changes, and the DOGE coin initiative), and divergences between soft and hard economic data all pose downside risks to growth.

JPMorgan’s business cycle indicator has been signaling a potential slowdown for three consecutive months. Historically, this indicator leads earnings-per-share growth by two to three quarters. If economic activity contracts at a time when market valuations are well above their levels from just weeks ago, that could spell trouble for stocks.

However, Lakos-Bujas also noted that such a slowdown might prompt the Federal Reserve to ease policy more quickly. “Markets may overlook near-term weakness by pricing in a ‘lukewarm’ economic outlook,” he said. In that case, lagging sectors—such as cyclicals and small caps—could stage at least a temporary rebound.