JPMorgan turns cautious on equities as Fed hike odds hit 58%

JPMorgan's trading desk dropped its bullish call on US stocks, turning tactically cautious as traders price a 58 percent chance the Federal Reserve raises rates in September.

JPMorgan's market intelligence desk dropped its bullish call on US equities, turning tactically cautious as traders price a 58 percent chance the Federal Reserve raises rates in September. The downgrade, the first since the team turned bullish in mid-June, follows Fed Chair Kevin Warsh's Jackson Hole speech that left the September 16 policy meeting "live."

"The Fed's path is the biggest variable," Andrew Tyler, head of US market intelligence at JPMorgan, wrote in a client note. "Fundamentals and earnings remain strong, but the next two to three weeks carry too many short-term pressures to stay long."

Tyler cited six drivers for the shift: the repriced Fed path, unclear positioning signals, post-Labor Day credit issuance that historically widens spreads, September's status as the weakest month for the S&P 500, a momentum-factor drawdown, and Broadcom's earnings due this week. JPMorgan's JPPQMO momentum index has fallen nearly 34 percent from its June high, beyond the typical 10 to 15 percent pullback, while the JPMPURE gauge is down more than 21 percent.

The desk recommends going long the Nasdaq 100 and short the Russell 2000, favoring the "Magnificent Seven" megacaps and large banks while underweighting small and mid-cap stocks. It also favors buying VIX products and shorting credit ETFs as hedges, and warns the "dollar depreciation" trade faces headwinds until the Fed meeting concludes.

The shift comes as the 10-year Treasury yield climbed past 4.75 percent, its highest since January 2025, and rate swaps signaled about a 70 percent probability of a quarter-point hike next month. The S&P 500 still closed August up roughly 2.5 percent, with the Dow posting a fifth straight monthly gain, but the September 16 decision and the August CPI report due September 11 now dominate positioning.

Warsh's speech flipped the Fed's policy presumption, according to former Vice Chair Donald Kohn, from "no move unless data supports it" to "a hike unless data shows it's unnecessary." Barclays and Societe Generale have both revised forecasts to expect hikes in September and December, which would push the fed funds rate above 4 percent from its current 3.50 to 3.75 percent range.

The August jobs report, due this week, is projected to show an addition of 55,000 jobs after July's unexpected contraction, and will serve as the first test of the labor market before the CPI print. "Equity bull markets tend to end with either a hiking cycle or a recession," Tyler wrote, adding that an economic contraction remains unlikely in the near term.

The tactical caution also reflects September's historical weakness in midterm election years, when the S&P 500 typically struggles before the vote then rallies afterward. Since 1990, the index has averaged gains of 5.4 percent, 11.4 percent, 12.5 percent and 14.7 percent at three, six, nine and 12 months after midterm elections, with win rates between 78 and 100 percent.

This article is for informational purposes only and does not constitute investment advice.