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JPMorgan Chase & Co. suggests that the worst of the US equity market correction may be over, as credit markets are signaling a lower risk of recession. In a note released Wednesday, strategists Nikolaos Panigirtzoglou and Mika Inkinen highlighted that credit markets, which have been accurate in predicting economic conditions over the past two years, are now less concerned about US recession risks compared to equity or rate markets.

JPMorgan's analysis shows that while small-cap stocks, which are more sensitive to domestic growth, are pricing in a 50% chance of a US recession, credit markets are indicating only a 9% to 12% likelihood of the same outcome. Equity and commodity markets share similar concerns, reflecting heightened recession fears.

This view from JPMorgan comes as a relief for investors who had been worried that the US economy might contract, pushing stocks close to correction territory. Recently, analysts at Goldman Sachs and Citigroup downgraded their outlooks on US equities, citing growth concerns. At the same time, market forecasters like Ed Yardeni have moderated their bullish predictions for 2025.

Trade policies under President Donald Trump, combined with government job cuts, have contributed to a market decline, with the S&P 500 Index dropping nearly 9% from its February peak. Tech stocks have also entered correction territory. JPMorgan strategists noted that this recent decline is more likely driven by quantitative fund adjustments rather than fundamental reassessments of US recession risks.

Some multistrategy hedge funds are facing significant challenges, with many being forced to unwind heavily crowded trades amid the market selloff. Brevan Howard Asset Management, a macro-focused hedge fund, is reducing the risk exposure of its traders following a performance slump that has wiped out gains from the previous year. 

Despite this, the market may find support from continued inflows into exchange-traded funds (ETFs). JPMorgan strategists pointed out that equities could receive further boosts from buying activity related to month- or quarter-end rebalancing by mutual funds, US defined benefit pension funds, and sovereign wealth funds, potentially totaling $135 billion.  JPMorgan concluded that if US equity ETFs continue to see inflows as they have recently, there’s a good chance that the current equity market correction may be nearing its end.

Paraphrasing text from "Bloomberg"all rights reserved by the original author