J.P. Morgan believes the artificial intelligence-driven market rally will endure recent tariff threats and a potential U.S. economic slowdown. The bank points to resilient technology fundamentals and increasing institutional demand as key factors.

The bank’s note suggests that increased tariffs might affect growth enough to prompt Federal Reserve action, with a potential rate cut by December. J.P. Morgan has adjusted its 2025 U.S. GDP growth forecast down to 1.3% from 2%, yet expects strong corporate profits and robust business investment to mitigate impacts.

Federal Reserve Rate Cuts Expected

Strategists now foresee up to four Federal Reserve rate cuts by early 2026, aiming for a target range of 3.25%–3.50%. Despite policy risks, they maintain that the broader macroeconomic environment remains supportive of risk assets.

The note describes the evolution of the AI trade from retail speculation to more enduring inflows from institutional and systematic approaches. This shift, coupled with strong earnings and balance sheets in the tech sector, is expected to sustain the market rally.

What this existing analysis tells us is quite clear: despite fresh tariff concerns and signs of a softer U.S. economy, J.P. Morgan’s team appears confident that the market rally—driven largely by technological advances involving artificial intelligence—has enough momentum to continue. Their confidence rests on two pillars: strong company fundamentals in tech and the increasing flow of capital from large institutional players. In essence, the rally is no longer being propped up by smaller, more speculative sources; instead, it’s being underpinned by sustained and measurable demand.

Potential Rate Cuts and Market Implications

Additionally, the firm now sees the slower growth outlook—downwardly revising its 2025 GDP estimate—possibly nudging the U.S. Federal Reserve towards a series of interest rate reductions, starting before the end of this year and extending into 2026. In this environment, policy decisions are expected to lean more towards easing, which can act as a cushion for riskier parts of the market. For traders involved with derivatives, especially those exposed to rate-sensitive sectors, that sends a very specific message: the potential for downward pressure on yields could reprice a variety of contracts across asset types.

Furthermore, the mention of robust corporate earnings and solid investment at the business level shouldn’t be glossed over. It means that firms, particularly in the tech space, aren’t just benefitting from hype; they are actually generating real profits and putting money back into operations. That strength on the balance sheet, in combination with the broader shift towards systematic participation, helps reduce volatility in the pricing of structured products and options tied to these sectors.

Kolanovic’s team touches on a swap in the source of AI-related inflows—from retail traders to funds using defined algorithms and larger mandates. This crossover is relevant, because institutional flows tend to have longer time horizons and lower churn rates. As a result, implied volatility levels may see additional compression in sectors where these strategies are concentrated, particularly in large-cap technology and communication services. Equity options traders might start to notice premiums narrowing, especially in shorter-dated contracts.

With the expectation of lower rates on the horizon, short-end interest rate derivatives may experience higher volume and tighter spreads. If cuts materialise as expected, that opens up clear positioning opportunities using standard curve steepeners or zoning into forward rate agreements that benefit from the same directional bias. The calendar spreads will also take on added importance as rate expectations are fed into the futures strip. In that scenario, it becomes more effective to lean into structures that reward downside economic surprises, paired with assets resilient to shocks.

It’s also worth considering that the resilience in corporate dynamics should dampen the severity of equity dislocations. That can shape tail-risk hedging. There’s far less reason now to pay considerably for out-of-the-money puts unless one expects a sudden shift in earnings guidance or a change in central bank tone. Instead, relative value strategies—such as volatility arbitrage across sectors—could offer more steady returns, particularly where correlations begin to diverge from historical ranges.

From our perspective, this is not a market primed for sharp reversals. Rather, it’s one that rewards selection—both in terms of asset class and strategy horizon.

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