J.P. Morgan: A V-shaped rebound may reappear amid geopolitical conflict; use weakness to add

Overview

This is a J.P. Morgan global equity strategy report centered on whether the global equity market could stage another V-shaped rebound after geopolitical conflict and an oil shock. The report argues that the market has not fully escaped geopolitical risk in the near term, and an escalation in the conflict could trigger another leg lower, but from a 3/6/12-month perspective, further weakness should be treated as an opportunity to add exposure. The authors emphasize that the current environment differs in important ways from the 2022 post-Russia-Ukraine stagflation template: earnings, wages, inflation, policy rates, and corporate pricing power do not support a simple replay of the 2022 bear-market narrative.

Core views

The report's core view is: first, military conflict naturally carries fat-tail risks and can lift volatility, but when sentiment turns bearish, de-risking is already substantial, and technicals are oversold, chasing the downside is often punished by rebounds on favorable headlines. Second, the current macro setup still supports a re-risking move, and earnings upgrades and earnings breadth have not been broken by the geopolitical shock. Third, inflation may rise by about 1.5 percentage points year over year because of oil, but if oil does not stay above $125/bbl for long, the shock may be insufficient to replicate 2022; only if oil approaches $150/bbl and stays there for several months does the risk begin to resemble the scale seen during the Russia-Ukraine conflict. Fourth, the long-duration trade should return, because whether the conflict eases or growth is hit, the market may be overpricing central-bank hiking or underpricing rate cuts. Fifth, the year-to-date leadership of non-U.S., EM, value, and small-cap styles should reassert itself in the second half of the year.

Analysis framework

The report uses macro scenario comparison, historical event backtesting, earnings expectation tracking, valuation and positioning analysis, and regional/style relative performance comparisons. The authors compare the current conflict with 2022 across multiple dimensions, including oil and gas price shocks, wage growth, services inflation, central-bank policy stance, corporate pricing power, European energy infrastructure, growth momentum, and investor sentiment. They also combine historical equity returns after sharp short-term oil spikes, technical oversold signals, fund flows, EPS upgrades, and regional valuation discounts to assess whether the risk/reward balance has shifted in favor of buyers.

Methodology notes

• Macro scenario analysisCurrent conflict versus the 2022 template

  By comparing inflation, wages, corporate pricing power, policy rates, energy supply, and growth momentum, assess whether the current shock will evolve into a 2022-style stagflation episode.

  The report argues that wage growth is easing, services inflation is cooling, corporate pricing power is weakening, and Europe’s energy infrastructure has improved, all of which are materially different from 2022, so the 2022 bear-market framework should not be applied mechanically.

• Historical backtestEquity returns after sharp oil price spikes

  Examine how equity markets performed during and after historical periods when oil prices rose at least 50-60% in the short term.

  The report says that in these historical samples, equities rose by about 1% on average during the oil shock, while the S&P 500 delivered average returns of 7% and 14% over the following 6 and 12 months, respectively, with a 12-month win rate of 73%.

• Technical and sentiment indicatorsOversold and de-risking signals

  Use RSI, relative price performance, risk-position reductions, and shifts in market sentiment to judge whether capitulation is near.

  The report argues that investor sentiment has moved from initially constructive to clearly pessimistic, de-risking is close to complete, and if another sharp 2-3 day selloff occurs, it may mark the final capitulation and create a favorable entry point.

• Earnings and valuation frameworkEPS upgrades, valuation discounts, and regional rotation

  Use changes in earnings expectations, valuation discounts, and fund flows to determine regional and style preferences.

  The report emphasizes that 2026 earnings expectations for the S&P 500, the Eurozone, and emerging markets are still being revised higher, while EM and Europe trade at clear valuation discounts, supporting continued outperformance of international markets, EM, value, and small caps versus the U.S., DM, and growth.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global equities

  Buy on weakness

  Strengths

  Earnings upgrades remain broadening, medium-term returns after historical oil shocks are usually positive, and sentiment and technical signals indicate selling pressure is already substantial.

  Weaknesses

  Geopolitical conflict still carries fat-tail risk, near-term headline risk is very high, and another sharp leg lower is possible.

  Comparison

  The report argues that the current backdrop is different from 2022 and should not simply be treated as a stagflationary bear market.

  Risks

  Conflict escalation, a sustained sharp rise in oil prices, central-bank policy mistakes, and further de-risking by investors.

• Eurozone equities

  Overweight / add on weakness

  Strengths

  Valuations are lower than in the U.S., political catalysts and earnings improvement support reallocation, and index targets imply 6-7% upside.

  Weaknesses

  The Eurozone is more dependent on energy imports and more vulnerable to conflict and energy-price shocks.

  Comparison

  MSCI Europe trades at about 14.0x forward P/E, below the U.S. at about 19.5x.

  Risks

  Another leg higher in energy prices, Eurozone growth sensitivity to shocks, and ECB hikes potentially becoming a policy mistake.

• Emerging market equities

  Overweight

  Strengths

  Valuation is about 12x forward P/E, representing a 34% discount to DM; positioning is light; earnings growth expectations are high; and China data is strong.

  Weaknesses

  Fund inflows stall during conflict periods, and performance is sensitive to the U.S. dollar and global risk appetite.

  Comparison

  The report prefers EM over DM and believes a decline in safe-haven demand for the dollar after the conflict eases will support EM.

  Risks

  Temporary dollar strength, disruptions to trade routes, and Chinese exports being weighed down by weaker global demand.

• U.S. equities

  Relatively underweight versus international markets

  Strengths

  S&P 500 2026 EPS growth expectations continue to be revised higher, and earnings momentum has not been broken by the shock.

  Weaknesses

  Relative performance versus non-U.S. markets has been weaker year to date, and valuations are higher than in Europe and EM.

  Comparison

  Before the conflict, MSCI World ex U.S. was up 11% year to date versus about 0% for the U.S.; U.S. valuations are about 19.5x forward P/E.

  Risks

  If the dollar remains strong or large-cap growth in the U.S. continues to lag, relative performance could come under pressure.

• Long-duration assets / long-duration trade

  Reiterate long

  Strengths

  If the conflict pressures growth, central banks are unlikely to keep hiking aggressively; if the conflict eases, the market can also look through a one-off inflation shock.

  Weaknesses

  The market has already raised ECB hike expectations and reduced Fed cut expectations, so price volatility may be high in the short term.

  Comparison

  The report believes the current repricing of policy rates may be excessive.

  Risks

  Oil staying high for a long time and inflation expectations becoming unanchored, forcing central banks to remain hawkish.

• Value style and small caps

  Preference

  Strengths

  Earnings breadth, valuation discounts, and re-risking favor continued outperformance by value and small caps.

  Weaknesses

  In risk-off phases, they may continue to face de-risking and liquidity pressure.

  Comparison

  The report argues that the year-to-date leadership of value, small caps, and non-U.S. markets should reassert itself once the conflict eases.

  Risks

  Earnings breadth stalls, growth is weaker than expected, or the market rotates back into defensives or large-cap growth.

• Cyclicals, semiconductors, and industrials

  Preference

  Strengths

  Benefit from re-risking, broader earnings upgrades, and improving global cyclical indicators.

  Weaknesses

  Sensitive to global demand, trade routes, and the capital expenditure cycle.

  Comparison

  Compared with defense, the report prefers cyclicals, semiconductors, and industrials.

  Risks

  An escalation in the Middle East conflict weighs on global demand and disrupts supply chains or trade.

• Defense sector

  Interest has faded

  Strengths

  Some individual names may still be attractive, and geopolitical risk provides thematic support.

  Weaknesses

  After two years as a preferred theme, the sector lacks broad earnings upgrades and has had weak directional conviction over the past six months.

  Comparison

  The report explicitly says it is less excited about defense now.

  Risks

  If the conflict becomes prolonged, the theme could rebound temporarily; if order growth and earnings fail to materialize, valuations could come under pressure.

• AI-affected companies and the Mag-7

  Tactically watch / cautious medium term

  Strengths

  The AI-affected basket has outperformed the market by 5% off its lows, and absolute downside may be smaller after the large valuation de-rating.

  Weaknesses

  A rebound in AI-hit stocks is not viewed as a long-term call; software, business services, and media still require caution in the medium term; the Mag-7 may continue to lag relatively.

  Comparison

  Mag-7 relative to S&P 500 forward P/E has fallen from 1.7x to 1.2x, near a 10-year low.

  Risks

  Negative AI impacts on employment and corporate earnings continue to build, weighing on related sectors.

Key data

• S&P 500 forward 6-month return after historical oil shocks+7%The report is based on historical samples in which oil prices rose at least 50-60% in the short term.
• S&P 500 forward 12-month return after historical oil shocks+14%, win rate 73%The report argues that the current shock is closer to a buyable shock than to the equity drawdown episodes seen in 1974, 2000, or 2022.
• Probability that stocks rise in the next 1 month after similar signals over the past 10 years82%The report says backtests show a high probability of gains in the next month after similar signals, with a 3-month median return of +5% and a 6-month average return of +8%.
• Potential inflation impact from oilAbout +1.5 percentage points year over yearThe report believes central banks can look through a one-off oil shock.
• Oil price pressure thresholdsAbove $125/bbl; close to $150/bbl and sustained for several monthsEconomists believe oil would need to remain above $125/bbl to approximate a more severe shock, and would need to approach $150/bbl and stay there for several months to replicate the scale of the Russia-Ukraine shock.
• Change in market rate pricingECB hike expectations up 70bp+; Fed cut expectations down 50bp+The report believes this pricing may be excessive.
• MSCI EMU 2026 consensus EPS growth18.2%Used to support the Eurozone earnings recovery and regional preference.
• Emerging markets 2026 expected EPS growth38.9%The report argues that EM earnings recovery is earlier-stage and more elastic.
• S&P 500 2026 EPS growth expectation18.4%, up from 15.4% at the end of FebruaryThis shows that the geopolitical shock has not interrupted U.S. earnings upgrades.
• MSCI World ex U.S. relative performance before the conflictUp 11% year to date before the conflict, versus about 0% for the U.S.The report believes non-U.S. relative performance could make new highs in the second half of the year.
• Valuations in Europe and the U.S.MSCI Europe about 14.0x forward P/E, U.S. about 19.5xEurope's valuation discount supports buying weakness.
• Emerging markets valuationAbout 12x forward P/E, a 34% discount to DMLight positioning, valuation discount, and improving fundamentals together support EM.
• China dataJan-Feb exports up 15.9% versus December; manufacturing PMI 50.4The report says China’s early-year data flow is strong, but an escalation in the Middle East conflict could still disrupt trade routes and global demand.
• Mag-7 valuation premiumRelative to S&P 500 forward P/E, down from 1.7x to 1.2xThe report believes the Mag-7 and AI-affected stocks may still lag, but absolute downside has narrowed.

Impact & implications

For asset allocation, the implication is that investors should not fully exit equities because of short-term geopolitical risk, but should be prepared to raise risk exposure on further declines. Regionally, the report favors international markets, the Eurozone, and emerging markets relative to the U.S. and developed markets; stylistically, it prefers value and small caps; and sector-wise, it favors cyclicals, semiconductors, and industrials while showing less appeal for defense. On rates, the report argues that the market may be overpricing rate hikes or fewer cuts, so the long-duration trade could reassert itself and support equity valuations.

Risks

• Geopolitical conflict escalates further, triggering another rapid de-risking in the market.
• If oil remains above $125/bbl, or approaches $150/bbl and stays there for several months, the inflation shock could widen materially.
• Central banks may overreact to the short-term rise in inflation; ECB hikes could become a policy mistake and hurt regional growth.
• Investor positioning has not fully capitulated yet, and final capitulation may still come in the form of a 2-3 day sharp selloff.
• The Middle East conflict could disrupt trade routes and suppress global demand, affecting Chinese exports and EM performance.
• If safe-haven demand for the dollar persists, it may weigh on emerging markets and non-U.S. equities.
• AI-related risks may continue to pressure earnings expectations for software, business services, media, and some large-cap tech names.

What to watch

• Whether the conflict eases, and any headlines around ceasefires, negotiations, or escalation.
• Whether oil breaks above and remains above $125/bbl, or approaches $150/bbl and stays there for several months.
• Whether wage growth, services inflation, and inflation expectations continue to decline or remain anchored.
• Whether ECB and Fed pricing continues to move higher, and whether policy mistake risks emerge.
• Whether global and regional EPS expectations continue to be revised higher, especially for the S&P 500, MSCI EMU, and EM 2026 earnings.
• Relative price action between MSCI World ex U.S. and the U.S., EM versus DM, value versus growth, and small caps versus large caps.
• Whether the dollar loses its safe-haven bid and whether EM fund flows recover.
• Whether China's exports, industrial production, fixed asset investment, and PMI data continue to hold up strongly.