JPMorgan strategists led by Mislav Matejka warn that only 9% of US small and mid-sized company stocks now pay dividends above a 30-year Treasury bond, compared to 19% two years ago. According to reports from JPMorgan, this dramatic decline reflects the impact of rising bond yields driven by government debt expansion. The bank notes that share prices are now at a 24-year low as investors increasingly favor safer government bonds over riskier equities. However, JPMorgan strategists now argue that the recent selloff looks overdone and that equity sentiment has turned overly bearish.
JPMorgan strategists attribute the bond yield surge to unprecedented global debt levels, with about 60% of the world economy now sitting in countries owing more than a year's output while still running budget deficits. As reported by JPMorgan, this represents a first in history. The 30-year Treasury yield hit 5.70% on Wednesday, a 24-year high, with yields remaining just shy of that peak as of the latest data. The Russell 2000 index of smaller US firms fell 1.31% that day, significantly outperforming the S&P 500's 0.22% decline.
Despite the warning, JPMorgan strategists have identified two stocks they want to own despite the challenging environment. According to the bank's analysis, Dashenlin Pharmaceutical, a $3 billion Chinese pharmacy chain, and Befesa, a €1.4 billion German-listed firm that recycles steel industry waste, both rate Overweight in their model portfolio. The strategists noted that today's dividend share levels resemble the 1990s, when long yields were falling, but emphasized that 'These are not the 1990s' in their current assessment.
Not all market participants share JPMorgan's caution. Jim Bianco, a longtime bond bear who has turned bullish, calls 5% yields fair value. Federal Reserve minutes released Wednesday showed most officials backing another 2026 rate hike, with the Fed's next decision scheduled for October 27-28. JPMorgan strategists warn that investors are 'ignoring' the risk of rising bond yields, predicting potential 'nasty surprises' for markets. However, the bank's latest analysis suggests that bonds themselves look close to oversold territory by their measures, with Fed funds futures having repriced nearly 200 basis points higher this year but showing signs of stabilization.
