Investing.com -- The hot run in stocks so far this year is likely to stall over the summer as sticky inflation persisting even as economy growth slows is likely to muddy the bullish path ahead.
"We see the market upside capped during summer due to the inconsistency between consensus call for disinflation and at the same time the belief in no landing and in earnings acceleration," JPMorgan said in a Monday note.
The market belief for months was that the Fed would cut rates because of market-friendly reasons including slowing inflation, but now with growth slowing the Fed cutting because it may need to rescue the economy could challenge the goldilocks scenario of disinflation, Fed cuts and an ongoing positive economy growth.
"Instead of easing for the market friendly reasons, such as falling inflation, the Fed could still end up cutting towards year end, but likely only if there is a more meaningful growth," JPMorgan said.
The reason why the Fed cuts rates -- either a cut into strength because inflation is slowing in a healthy economic backdrop, or cutting into weakness because the economy is struggling -- also needs to be factored into the path ahead.
"As equities decoupled from the Fed, the market was implicitly making the assumption of growth acceleration coming up, but that might not materialize," JPMorgan added.
Previously a fall in bond yields was greeted by bullish bets on stocks as investors bet the Fed would cut rates and preserve the soft landing for the economy, but now with growth in question a rate cut would signal worries about the economy and thus, also earnings growth.
"The next time bond yields fall we do not believe the market will have as positive a reaction as it did in Nov-Dec, we might revert to a more traditional positive correlation between bond yields and equities," JPMorgan added.
But with the Fed's next meeting about one week away, investors may not have too wait long for fresh guidance on how the recent economic has swayed the central bank's thinking on economic growth, inflation and its three rate-cut outlook for this year it projected in March.