The stock market rally has room to run into year-end as growth stocks benefit from falling bond yields, JPMorgan says

The current stock market rally has more room to run into the end of the year, and it will be driven by the surge in growth stocks, according to a Monday note.

As long as bond yields continue to fall, the firm doesn't see any reason to change its recommendation of overweight to growth stocks over value stocks.

The initial catalyst for the recent surge in growth stocks was a 100 basis point decline in long-term bond yields.

The gap between inflation expectations and bond yields is tighter than it has been in the past. Bond yields will be constrained in the near term.

There are a few things that need to happen for value stocks to start performing better.

This is the first thing. The 10-year yield curve was re-steepened.

The yield curve in the US is inverted at the moment. We don't think it's a good idea to switch back into value before the yield curve changes. Curve steepening is required for a number of value sectors to lead.

A re-steepening of the yield curve would cause long-term yields to rise and short-term yields to fall so that longer-term bonds are more expensive than short-term bonds.

There are two Economic data is strong.

Strong economic data is good for financials. We don't think the macro data will get stronger before Q4

There are three. There's a lot of steam in China activity.

Most value sectors are related to China activity. Chinese M1 and credit impulse has increased, but that is yet to translate into better PMIs. China's economy slowed in July.

The beaten down sectors still have room for more upside and can drive the stock market higher, as no signs of the above three factors changing anytime soon.

If value stocks regain their footing against growth stocks, that doesn't mean the stock market is going to go down again, as value stocks recently outperformed during the initial market sell-off. There is potential for value stocks to perform better than growth.

If the growth-policy tradeoff improves towards the end of the year, value could again lead, but this time in an up market.