JPMorgan expects the S&P 500 to rise more than 10% over the next 12 months, even as the US economy faces fresh inflation problems. Kriti Gupta, an executive director and global investment strategist at JPMorgan Private Bank, expects the benchmark index to reach around 8,200 by the middle of next year.
US inflation risks
Gupta said inflation is already arriving in waves. The first major wave came after the pandemic, when prices jumped sharply. This was followed by energy-related inflation shocks linked to the Iran war earlier this year, Gupta said, via Business Insider.
But JPMorgan does not believe inflation alone will end the stock market's long-term rally. Gupta said the main foundations supporting the bull market are still strong. One major reason is strong economic growth. The US economy has continued to expand, giving companies and investors confidence even as inflation remains a concern.
AI demand stays strong
Another major reason is the huge demand for artificial intelligence. Gupta expects another year of double-digit stock market returns. "We're looking at double-digit returns again this year. And there's still so much to go," Gupta said. "We are in the middle of the largest wealth creation in history in the United States."
Gupta told Business Insider. Her prediction is especially bullish because many investors are currently worried about the stock market. Investors are concerned that rising inflation, higher oil prices, interest-rate hikes and weakness in technology stocks could hurt the bull market.
{{/usCountry}}Gupta told Business Insider. Her prediction is especially bullish because many investors are currently worried about the stock market. Investors are concerned that rising inflation, higher oil prices, interest-rate hikes and weakness in technology stocks could hurt the bull market.
{{/usCountry}}Higher oil prices are one of the biggest concerns for investors. If oil becomes more expensive, it can push up prices across the economy. That could make inflation worse and potentially force the Federal Reserve to keep interest rates higher.
Fed rate hike fears
The Nasdaq 100 has also taken a hit. The index briefly fell as much as 11% from its recent peak, putting it close to correction territory. Investors are also preparing for possible higher interest rates. Markets were pricing in an 86% probability of at least one Fed rate hike by the end of 2026, according to the CME FedWatch tool cited in the report.
But Gupta believes higher interest rates would not necessarily destroy the stock market's long-term uptrend. Her argument is that the US economy appears strong enough to handle higher borrowing costs. The reason behind any rate hike also matters. Gupta said stocks could still perform well if the Federal Reserve raises rates to deal with a structural inflation problem rather than because economic growth is collapsing.
US economy remains strong
US economic growth remains steady. Real US GDP grew at a 2.1% annualized rate in the first quarter, which was stronger than economists had expected. The job market is another reason for JPMorgan's optimism. While there are some signs of weakness, the overall labor market continues to hold up.
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The US unemployment rate was 4.2% in June. That level remains close to historic lows, showing that the labor market has not suffered a major collapse. AI remains one of the biggest supports for the stock market. Even after a recent sell-off in memory and semiconductor stocks, Gupta said demand for artificial intelligence remains "massive."
US companies are also seeing very strong profit margins. Companies benefiting from AI demand are helping drive corporate profitability higher. S&P 500 companies are on track for their strongest profit margins in years. Based on companies that had reported second-quarter earnings at the time of the report, the index was on track to record its highest net profit margin since the Great Financial Crisis, according to FactSet.
S&P 500 demand is high
JPMorgan therefore does not see a major reason for a much deeper stock market decline right now. "We're not seeing hits to economic growth that would justify a larger pullback in the stock market at this stage," Gupta said, via Business Insider.
JPMorgan's top stock picks
Financial stocks are another area JPMorgan likes. Gupta believes banks and other financial companies could benefit as the AI boom spreads beyond technology companies and into the wider economy. Banks are using AI themselves to improve efficiency. But JPMorgan sees an even bigger opportunity from the wider economic impact of AI, including higher productivity across different industries.
Gupta said the AI boom could create a ripple effect across the economy. "In addition to banks actually using AI for their own efficiency, we are also feeling very strongly about the ripple effect into the economy," Gupta said, via Business Insider.
Financial stocks have already performed strongly. The financials sector gained about 5% over the previous three months, making it one of the best-performing sectors in the S&P 500, according to State Street Investment Management. JPMorgan also sees opportunities outside the US. Gupta pointed to emerging markets as a way for investors to diversify their portfolios.
JPMorgan's Latin America and gold picks
Latin America is one region JPMorgan particularly likes. The region is seeing stronger economic growth as its middle class continues to expand, Gupta said. Latin American markets have already delivered strong returns this year. The MSCI EM Latin America Index was up about 40% this year, compared with an 11% gain for the broader iShares MSCI Emerging Markets ETF.
Both emerging-market measures have outperformed the US market this year. This makes Latin America an important diversification opportunity for investors who do not want all their money tied to US stocks. Wealthier investors can also consider alternative assets.
Gupta said alternative investments could provide another way for high-net-worth clients to diversify their portfolios. Gold is another part of JPMorgan's strategy. Gupta recommended that investors consider allocating up to 5% of their portfolio to bullion, depending on their individual portfolio needs.
The overall JPMorgan message is that inflation risks do not automatically mean a stock market crash. Gupta believes the US economy, corporate profits, AI demand and strong investor appetite can continue supporting stocks.
That is why JPMorgan remains bullish on the S&P 500. Even with possible inflation shocks, higher interest rates and technology-sector volatility, Gupta expects the index to gain more than 10% over the next 12 months and reach around 8,200 by mid-next year, according to Business Insider.