Investor worries over hyperscaler spending and aversion to software names will likely continue
JPMorgan doesn't see investor anxiety around hyperscaler spending improving this year.
Technology stocks aren't likely to be the main drivers of stock markets in the second half of the year, according to JPMorgan.
The strategists, led by Mislav Matejka, wrote in a note on Monday that they do not see the shares of companies linked to tech and the artificial-intelligence industry dominating as they did in the latter half of 2025.
One reason is that they expect Magnificent Seven stocks - Alphabet $(GOOGL)$, Amazon (AMZN), Apple $(AAPL)$, Meta $(META)$, Microsoft $(MSFT)$, Nvidia (NVDA) and Tesla $(TSLA)$ - will probably continue to suffer from investors' concerns that high capital expenditure won't necessarily yield strong results.
The strategists also preach caution and expect continued investor wariness around so-called "AI cannibalization areas," namely the software, business services and media sectors.
"We think these will keep struggling longer term, irrespective of whether they show resilient activity in light of the AI threat, but there could be tactical bounces, given the big derating seen already," the strategists noted.
Software shares have faced a significant selloff since January on fears that the models of these businesses may be entirely disrupted by AI. The iShares Expanded Tech-Software Sector exchange-traded fund IGM has tumbled by almost 11% year-to-date. In the same period, Roundhill's Magnificent Seven ETF MAGS has flatlined.
The strategists prefer semiconductor stocks over hyperscalers and companies vulnerable to AI, especially as spending on the technology is likely to increase. However, they expect cyclicals to lead into the second half of the year, and also expect consumer cyclicals could see better performances ahead.
JPMorgan has also continued to call for market leadership to broaden, and see a handful of important equity drivers for the second half of the year, starting with the U.S. economy likely holding up the Iran war.
A second is expectations that the Federal Reserve will try to be "as accommodative as possible." Before the conflict, markets were pricing in interest-rate cuts, which have since unwound, but they said the Fed could turn more dovish on signs of inflation clearly moving lower in the months ahead.
Other positives for stocks include strong second-quarter earnings, as well as attractive equity valuations beyond the U.S., where they are the most stretched. They cited data showing that with an average current price-to-earnings ratio of 20.2 compared with its 20-year median, the U.S. market is 21% higher than its historical level. For the U.K., it's 5%, and for Japan, it's 18%.
"If we are right over continued broadening in market participation in 2H, the Iran conflict not dramatically re-escalating, and questions with respect to AI monetization not going away, the chances are that non-U.S stocks will finish 2nd year in a row ahead of the U.S.," they said.
Finally, the strategists said investors have by now probably reduced their excess positioning in crowded stocks like popular semiconductor stocks, which should help that group stabilize.
"It is very much reassuring that, despite material unwind in momentum factor, an almost 40% fall in KOSPI KR:180721 and 30% in SOX SOX in the past 4-6 weeks, up to last Friday's rebound, global equity indices - MXWO UK:MXWO, SPX SPX, SXXP XX:SXXP etc. - are all still within 1% of all time highs," they said.
-Nora Redmond
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