JPMorgan warns S&P 500 upside limited in second half of 2026

The S&P 500 is expected to underperform international equities through the remainder of 2026 as four distinct risks threaten to cap returns, according to JPMorgan.

"We expect US stocks to rise from current levels, but returns in the second half are unlikely to match what we saw in the first six months of the year," said Zahin Ov, senior researcher at JPMorgan, in a report published July 21.

The bank identified four primary headwinds: rising market dysfunction and volatility risk, accelerating inflation and higher interest rates, the potential for a negative feedback loop driven by retail investors, and growing instability in the labor market. Each factor alone could dampen equity returns, but their convergence creates a more challenging environment for US stocks relative to other developed markets.

The call carries weight given JPMorgan's position as the largest US bank by assets, with its trading desk handling roughly $1.5 trillion in daily flows. The report's tilt toward international equities suggests a potential rotation out of US markets, which have outperformed global peers for much of the past decade.

Four Risks That Could Derail the Rally

The warning comes after a strong first half for US equities. The S&P 500 had rallied through mid-2026, driven by artificial intelligence optimism and resilient corporate earnings. JPMorgan's cautious outlook now raises questions about whether that momentum can sustain through year-end.

Among the four risks flagged by the bank, the potential for market dysfunction stands out. Periods of heightened volatility — whether triggered by liquidity dislocations, options market gamma squeezes, or sudden shifts in macro positioning — could amplify drawdowns in a market already priced for perfection. The bank also warned that rising inflation could force the Federal Reserve to maintain or even tighten monetary policy, a scenario that would pressure equity valuations through higher discount rates.

Retail investor behavior presents a wild card. JPMorgan cautioned that a negative feedback loop could emerge if retail traders, who have been significant marginal buyers in recent years, begin to unwind positions in response to losses or margin calls. Such a dynamic could accelerate declines in the most heavily owned names. Separately, labor market instability — whether through weakening payrolls or rising unemployment claims — would challenge the consumer spending backdrop that has supported corporate profits.

International Markets Take the Lead

The report's relative preference for international equities marks a notable shift. Global markets, particularly in Europe and parts of Asia, have lagged the US in recent years on both valuation and performance metrics. A rotation would benefit exchange-traded funds tracking non-US benchmarks, including the Vanguard FTSE Developed Markets ETF and the iShares MSCI EAFE ETF, both of which have seen steady inflows this year.

For US equity investors, the JPMorgan report serves as a reminder that the second half of 2026 may require a more defensive posture. With the S&P 500 trading at elevated valuations relative to history, the margin for error is thin. Any deterioration in the four risk factors identified by the bank could trigger a reassessment of US equity exposure across institutional portfolios.

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