Market update

Markets maintained a tenuous holding pattern this week as investors monitor the escalating conflict between Iran and Israel. Oil (+3.6%) prices topped $78 per barrel for the first time since January amid fears of war escalation in the Middle East, with ongoing concerns about flows from Iran and threats to vessel traffic in the Strait of Hormuz. While markets are on edge, it seems like crude prices have some more room to rise before they start to cause real friction for the U.S. economy.

The June Federal Open Market Committee meeting met expectations. The Federal Reserve left rates unchanged and kept messaging consistent: Tariff-driven economic uncertainty and inflation risks complicate its efforts to ease monetary policy. They still expect that all else equal, they will lower interest rates by 50 basis points this year. Treasury yields are relatively unchanged, with no tenor moving more than 2 basis points.

U.S. equities are flat headed into Friday trading following yesterday’s holiday. The tech-heavy Nasdaq 100 (+0.4%) eked out a gain alongside small caps (Solactive 2000 +0.4%).

While most eyes are watching to see how far the conflict in the Middle East might escalate and whether the White House will decide to intervene directly, we have been seeing some signs that the recovery in dealmaking and capital market activity may be gaining speed.

Spotlight

Coming into this year, we were expecting a meaningful resurgence in dealmaking activity fueled by the Trump administration’s pro-business, deregulatory agenda. And there were green shoots to start the year: global mergers and acquisitions (M&A) activity was up 17% year-over-year in Q1 2025. But tariff-induced uncertainty curtailed any momentum. However, we are now starting to see three distinct drivers that could accelerate the recovery:

1. Artificial intelligence

Artificial intelligence (AI) is rapidly becoming a catalyst for transformative change in the M&A and initial public offering (IPO) landscapes. Generative AI is reshaping the M&A process, with about one in five companies currently utilizing AI and expectations that more than half will integrate it by 2027, according to Bain. AI’s ability to improve various stages of dealmaking – from sourcing and screening to diligence and integration – is raising the standard for competitors. Those leveraging AI are gaining a competitive edge, making it essential for others to adopt these technologies or risk falling behind in the fast-paced environment. 

The broader tech ecosystem is also focused on AI acquisitions to gain and maintain a strategic advantage. Meta’s $14.8 billion Scale AI deal is just the latest testament to the rise of AI tie-ups. Meta finalized a multibillion-dollar investment in Scale AI and recruited the startup’s CEO to join its AI efforts.

OpenAI is acquiring io, a startup co-founded by Apple veteran Jony Ive, in a nearly $6.5 billion all-stock deal to develop AI-powered devices. This move highlights the transformative potential of AI in M&A, as tech companies increasingly acquire AI startups to enhance their offerings and leverage their experience.

CoreWeave, an AI cloud-computing startup, has experienced a remarkable post-IPO rally and is now up over 280% as a public company. It has gained significant traction due to its multi-billion-dollar contracts with Nvidia, OpenAI, Microsoft and other major companies propelling AI. CoreWeave expects capital expenditures of $20 billion to $23 billion this year to expand its AI infrastructure and data center capacity.

AI deal value so far this year exceeds $140 billion, crushing last year’s total of roughly $25 billion.

We are confident that AI will continue to drive significant productivity gains for businesses, consumers and the economy. The integration of generative AI into M&A processes and the strategic urgency to stay at the leading edge of AI should propel dealmaking activity.

2. Financial sector deregulation

While tariffs have dominated headlines, a significant conversation around bank deregulation is unfolding, poised to spur M&A activity through increased lending. Following the Global Financial Crisis, regulations were tightened to strengthen bank balance sheets and prevent another collapse. However, these regulations have become increasingly stringent over time. In the wake of the March 2023 banking crisis and the proposed Basel III Endgame rules, U.S. banks have built up capital amid regulatory uncertainty. Now, with the new administration signaling a potential easing of these regulations, banks are expected to release some of this built-up capital.

Treasury Secretary Scott Bessent has emphasized the importance of bank deregulation to unlock non-government lending and stimulate private sector growth. Deregulation is seen as the next phase of the administration’s agenda. The latest move plans to reduce the enhanced supplementary leverage ratio (eSLR) by up to 1.5 percentage points. The rule requires large lenders to hold a certain amount of capital against their investments in Treasuries. With an easing of this rule, banks may have more flexibility to lend as they are required to hold less capital against their leverage exposure. As banks gain more balance sheet capacity, they are likely to use it for capital distributions to shareholders, M&A activity for themselves and lending growth for the broad economy.

The ongoing dialogue around bank deregulation presents a multifaceted opportunity for the U.S. banking sector. As regulatory requirements soften, banks are positioned to deploy significant excess capital, enhancing shareholder returns, loan growth and M&A activity. This deregulation could lead to improved profitability through increased capital markets activity and reduced regulatory expenses, with preferred stock and equities both likely to benefit.

3. Private equity firms are looking for alternative avenues to exit

The private equity (PE) market is currently navigating a complex landscape marked by a dichotomy between investments and exits. On the investment side, the industry is flush with near-record levels of dry powder, with approximately 25% of it being over four years old. Conversely, exit activity is at its lowest since the Global Financial Crisis, with distributions as a percentage of net asset value (NAV) at multi-year lows. This dynamic isn’t surprising, given the elevated uncertainty over the past three years characterized by the rate shock in 2022 and heightened economic and policy uncertainties. This has contributed to muted IPO and strategic M&A activity, as well as widening bid-ask spreads in private markets, leading to a negative balance of distributions to contributions.

Despite these challenges, 2024 saw the industry come back into better balance with the ratio of distributions to contributions breaking even. However, the outlook for traditional dealmaking is still clouded by prolonged uncertainty, prompting PE firms to explore alternative avenues for exits.

That said, secondaries have come into focus. Global secondary volume surpassed $160 billion in 2024, a roughly 45% increase from 2023. Secondaries provide diversification by allowing investors to acquire interests in existing funds across different vintage years and managers, mitigating risks associated with single fund investments. They may also bypass the early-stage “J-Curve” effect, potentially allowing investors to see returns sooner by investing in more mature funds, often at a discount.

As the median holding period for buyout-backed exits rises and global buyout distributions remain low, focusing on alternative exit strategies will be crucial for PE firms seeking to navigate this evolving landscape. Even if traditional deal activity remains subdued, the potential for secondaries offers a promising avenue for liquidity and value creation.

The current dealmaking and capital market environment seems to be heating up. AI innovation, deregulation, and private equity’s need to generate liquidity are promising catalysts for a continued revival. As AI continues to drive productivity gains and competitive advantages, deregulation unlocks lending potential, and secondaries offer liquidity and diversification, investors are well-positioned to capitalize on these potentially transformative trends.

Reach out to your J.P. Morgan advisor to discuss how these themes might impact your portfolio.

All market and economic data as of 06/20/25 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

Index definitions:

The Solactive United States 2000 Index intends to track the performance of the largest 1001 to 3000 companies from the United States stock market. Constituents are selected based on company market capitalization and weighted by free float market capitalization.

The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight of the index total at each quarterly rebalance.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases. 

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

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