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.

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.

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.

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.