JPMorgan's, JPM, market prediction model says equities look safe for the next 6 months

Markets paused on Wednesday as investor focus shifted from geopolitical tensions to concerns over interest rates and tariffs. A wave of economic data expected over the next two days could influence market direction.

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Of course, markets don't move solely on economic data. Strategists at JPMorgan, led by Nikolaos Panigirtzoglou, say they’ve developed a model that predicts the direction of the S&P 500 over a six-month horizon. The model analyzes six key indicators — trading volume, valuation, investor positioning, capital flows, economic momentum, and price momentum — comparing each against its historical norm, or z-score.

The model was trained using data through late 2022 and then tested on more recent figures. The strategists focused heavily on predicting downward movements, noting that a “buy and hold” strategy would have been correct more than 90% of the time during the test period.

For the time periods it was trained on, the model correctly predicted market declines 76% of the time. In out-of-sample tests — meaning time periods the model wasn’t trained on — it still achieved a 63% success rate. That performance beat several competing models, which tended to struggle especially with forecasting down markets.

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The analysis also highlighted how each signal contributed to market outcomes. Strong economic momentum — measured by changes in the global manufacturing purchasing managers index (PMI) over two months — and high trading volume increased the likelihood of a rising market. Conversely, excessive bullish positioning or large inflows into equities relative to bonds often signaled overcrowding and a higher chance of a market drop.

Similarly, unusually strong equity momentum compared to the bond market was seen as a red flag.

Perhaps the most surprising insight came from valuation: more attractive valuations were actually associated with weaker future returns. The strategists linked this to movements in the 10-year Treasury yield — a drop in yields, while supportive of valuations, could signal weaker economic growth ahead.

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As for what the model predicts now? The outlook is highly optimistic: it suggests there’s a 96% probability that the stock market will rise over the next six months.

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