The stock rally is masking stagflation risk raised by the latest GDP report, JPMorgan says

• JPMorgan says the recent stock rebound driven by robust earnings masks looming stagflationary risks.
• The soft landing narrative is challenged by the first-quarter GDP report.

The recent rally in the stock market, bolstered by a wave of upbeat earnings, is glossing over a host of risks raised by the latest economic data points, JPMorgan said this week.

Earnings season has gained momentum with strong first-quarter reports from tech stalwarts Alphabet and Microsoft, among others, following a weekslong pullback, but JPMorgan's Marko Kolanovic said the latest "downside surprise" on first-quarter GDP and the "upside surprise" on inflation challenge the "soft landing views held by many in the market.

"While the worry for risk markets is overheating that jeopardizes rate cutting, in contrast to the overheating story, the recent GDP print heads in a stagflationary direction relative to market expectations," the JPMorgan team said in a note on Monday.

Analysts explained that hopes for a soft landing were built on strong economic growth and prospects that inflation would calm down once a few key problem sectors settled back down, particularly rent inflation and auto insurance.

However, the recent economic data has dashed those hopes, and Kolanovic said the message of lower growth and higher inflation — a situation that points the way to stagflation — hasn't been received by market.

The fresh real gross domestic product index rose at an annualized rate of 1.6%, less than the estimated 2.5%. Meanwhile, the Fed's go-to inflation measure exceeded the forecasted 2.7% in March, clocking in 2.8%.

The bank said that there's solid proof that the worldwide trend of disinflation has come to a halt.

Even on the earnings front, JPMorgan analysts said they are "not overly impressed" so far this season.

Among the roughly 42% of S&P 500 companies having reported, 75% are beating EPS estimates, but only 59% are topping revenue estimates, slipping below the 63% average.

Other Wall Street voices have sounded off on the risk of stagflation recently. Jamie Dimon and other experts are sounding the alarm, saying the US might be headed for a 1970s-style scenario, complete with a stock market crash.