As CEO of a global bank, Jamie Dimon is keen to pay attention to broad global economic drivers and geopolitical risks. He outlines his ideas for investors in his letter to shareholders every year, which contains valuable insights into asset pricing and investor risks. It can be a great read even if you don’t own JPMorgan Chase stock.
In this year’s letter, Dimon echoed a warning shared by investing legend Warren Buffett about 26 years ago. There’s no doubt that today’s market shares some similarities with the dot-com-fueled stock market we saw at the turn of the century. For example, the S&P 500 (^GSPC 0.11%) trades at an elevated valuation. In many ways, however, it’s worlds different. Still, the warning applies just as much today as it did back then, and it could have a tremendous impact on the entire stock market.
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The gravitational force acting on all asset prices
In a November 1999 article published in Fortune magazine, Buffett explained that one of the most important factors affecting investment results is interest rates. “These act on financial valuations the way gravity acts on matter,” he wrote. “The higher the rate, the greater the downward pull.”
At the time, interest rates were heading higher, but investors’ expectations for returns, as seen in the earnings multiples they were willing to pay, were also climbing. Buffett warned that for those expectations to work out, investors need to expect significant rate cuts. To be sure, the Federal Reserve started slashing interest rates in 2001, but that was in response to a weakening economy that led to the dot-com bubble popping. Stock prices still didn’t recover in response to the Fed’s action, but it could have been much worse without the Fed lowering interest rates.
Dimon warned that the current economic environment could also weigh on investors, but the bigger worry is inflation rising (regardless of a recession). That would lead to higher interest rates. “Interest rates are like gravity to almost all asset prices,” Dimon said, echoing Buffett’s words in his recent letter to shareholders.
The logic behind why interest rates are so influential hasn’t changed and never will. Investors are willing to accept risk in exchange for higher expected returns. When interest rates climb, investors can receive a higher risk-free return by investing in Treasury bonds. That means the returns demanded for assets like stocks need to move higher. But a business can’t just magically increase its earnings. So, the only way to increase the expected return for the stock is to buy it at a lower price.
We saw this play out in 2022. As the Fed raised interest rates, stock prices fell as investors could earn much better returns from Treasury bonds. That led to a bear market in stocks at the same time that bonds fell in value.
Where will interest rates go in 2026?
Dimon’s warning points to the potential for inflation to be “the skunk at the party.” Steadily rising inflation would lead to higher interest rates, or at least higher than the market anticipates today.
Indeed, recent data points show inflation is starting to rise again after the Fed’s efforts to bring inflation down over the last few years. The Core Personal Consumption Expenditures Price Index, the Fed’s preferred inflation measure, increased 3% year over year in February. That’s slightly better than the 3.1% core inflation we saw in January, but still above the levels seen in 2025.
Importantly, the data used were collected before the launch of the war in Iran, which could exacerbate inflationary pressures. The Consumer Price Index (CPI) for March hit 3.3% as energy prices spiked as a result of the conflict. Core CPI was still 2.6% higher last month, lower than last year and in line with the last few months.
Federal Reserve Chair Jerome Powell noted at last month’s FOMC meeting that inflation expectations have climbed so far this year, with the median projection now sitting at 2.7% for 2026. The prospects for further rate cuts have significantly worsened. Futures traders now expect rates to remain steady through the end of the year. Prior to the most recent meeting, they were pricing in expectations for one or two cuts with an outside chance for three cuts. Now traders are pricing in a small chance that the Fed will actually hike rates.
The stock market has experienced significant volatility amid the Iran war. However, prices and valuations still remain fairly elevated despite the worsening outlook for interest rates. While we might not be headed for a redux of 26 years ago, investors should consider the impact of interest rates on long-term returns and seek value in today’s market.
