The AI cycle is still on, but market focus is shifting from “capex growth” to “proof of commercialization and returns.”

Overview

This report is J.P. Morgan U.S. equity strategy's outlook for the 2Q26 earnings season. The core themes are hyperscalers, AI hardware, AI capex, commercialization/monetization, and the unwinding of momentum trades. The report argues that the AI cycle remains intact, but investors are no longer satisfied with capex increases alone and are paying more attention to incremental ROIC, cloud and advertising monetization, enterprise workload migration, AI compute sales, and the inflection point in free cash flow.

Core views

The report's core judgments are: first, hyperscaler fundamentals remain resilient, and after valuation and positioning have improved, their medium-term risk-reward is better than that of upstream AI hardware; second, momentum trades in AI hardware and storage have recently unwound from extremely crowded levels, making the near term healthier though medium-term volatility may persist; third, the overall 2Q26 earnings season is constructive, but earnings growth is highly concentrated, with large contributions from technology, Nvidia, Micron, and energy; fourth, semiconductor demand remains strong, and the focus has shifted from “whether AI demand is real” to whether the supply chain and power availability can keep up.

Analysis framework

The report combines bottom-up 2Q26 earnings expectations, industry earnings contributions, hyperscaler capex forecasts, financing capacity, free cash flow curves, revaluation gains from private AI investments, momentum-factor crowding, and earnings previews for key industries to assess short- and medium-term U.S. equity allocation.

Methodology notes

• Strategy frameworkRelative allocation across the AI value chain

  AI midstream vs. AI upstream

  The report views hyperscalers as the AI midstream and treats storage, semiconductors, and AI hardware as the AI upstream, comparing the risk-reward of the two in terms of capex, monetization capability, valuation, and positioning crowding.

• Factor frameworkMomentum crowding and drawdown

  Momentum unwind

  The report uses momentum-factor crowding and recent drawdowns to assess the tactical health of AI hardware trades, and warns that future AI equity supply, the slope of capex, financing absorption capacity, and efficiency breakthroughs could continue to drive volatility.

• Earnings frameworkS&P 500 2Q26 earnings scorecard

  Bottom-up earnings season tracking

  The report tracks the number of companies that have reported, beat rates for revenue and earnings, the magnitude of earnings surprises, EPS revisions, and industry contributions to evaluate the quality of the earnings season.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hyperscalers / AI midstream

  The report's preferred medium-term allocation direction

  Strengths

  Large monetization potential in cloud, advertising, enterprise applications, and AI compute; operating cash flow remains strong; credit-market absorption capacity is still viewed as sufficient.

  Weaknesses

  Elevated capex suppresses free cash flow, and demand for external debt and equity financing is rising.

  Comparison

  Relative to upstream AI hardware, the report sees better risk-reward, especially after valuation and positioning improved.

  Risks

  If returns on AI investment materialize more slowly than expected, free cash flow improvement may be delayed until 2028 or later.

• AI hardware, storage, semiconductors / AI upstream

  Still supported by AI demand, but with higher momentum-trading risk

  Strengths

  AI demand is strong, and hyperscalers and AI labs remain capacity-constrained; NVDA Blackwell/Rubin and AVGO AI revenue paths improve visibility.

  Weaknesses

  A recent roughly 15% drawdown reflects the unwind of crowded trades; consumer electronics and client markets are more mixed.

  Comparison

  Fundamentals remain constructive, but compared with cloud vendors, this segment is more exposed to momentum crowding and volatility in supply expectations.

  Risks

  Supply chain, power availability, AI equity supply, the slope of capex, and efficiency breakthroughs could all affect valuations.

• Enterprise software and cybersecurity

  A beneficiary of AI commercialization and rising security costs

  Strengths

  Security concerns may accelerate private- and public-sector workload migration to cloud platforms, making cybersecurity a long-term theme.

  Weaknesses

  Still needs to prove that AI-related demand can translate into revenue and profit.

  Comparison

  The report lists this as a selected opportunity within technology rather than a pure AI hardware trade.

  Risks

  If enterprise AI budgets slow or security demand comes in below expectations, valuation support will weaken.

• Energy

  An important contributor to 2Q26 earnings growth

  Strengths

  Higher oil prices and upstream earnings leverage are driving earnings improvement at companies such as Chevron and Exxon.

  Weaknesses

  Contribution is concentrated and tied to geopolitical events and oil prices.

  Comparison

  It has a small market-cap weight but a high earnings contribution, making it an important source of growth concentration during the earnings season.

  Risks

  A decline in oil prices, refining-margin volatility, or easing geopolitical risks could weaken earnings momentum.

• Healthcare

  A defensive and low-volatility allocation direction

  Strengths

  Valuation and positioning are relatively attractive, and high-growth areas may benefit from AI-driven drug discovery and lower costs.

  Weaknesses

  It is the only sector expected to post negative earnings growth in 2Q26, and after the recent rebound it is more dependent on single-stock catalysts.

  Comparison

  The report still views it as a preferred low-volatility sector.

  Risks

  Insufficient earnings, guidance, or pipeline catalysts could make recent momentum hard to sustain.

Key data

• Expected 2Q26 S&P 500 earnings growth+23% y/yAbout +19% excluding energy; revenue is expected to grow about +12% y/y.
• Share of 2Q26 companies already reported6%As of the report date, 31 S&P 500 companies had reported.
• Earnings beat rate of reported companies100%The average over the past 4 quarters was 78%.
• Revenue beat rate of reported companies87%The average over the past 4 quarters was 75%.
• 2Q26 EPS$81.75Equivalent to about +23% y/y.
• 2026E EPS$341.86Equivalent to about +26% y/y.
• 2027E EPS$404Equivalent to about +18% y/y.
• Expected AI-related capex by end-2026about $870BAbout +77% y/y, of which hyperscalers account for about $750B.
• Forecast 2027 GOOGL capex growth+54%, about $300BFrom internet analyst forecasts cited in the report.
• Forecast 2027 AMZN capex growth+42%, about $300BFrom internet analyst forecasts cited in the report.
• Forecast 2027 META capex growth+42%, about $200BFrom internet analyst forecasts cited in the report.
• Debt issuance by the five largest hyperscalersabout $40-50B in 2022; about $190B in 2026The use has shifted from mainly buybacks to data center construction.
• Expected hyperscaler operating cash flow in 2027> $900BThe report argues that increased external financing does not imply deterioration in operating fundamentals.
• Expected 2Q26 earnings growth for the energy sector+122% y/yEnergy accounts for about 4% of S&P 500 market cap, but contributes about 23% of expected y/y earnings growth.
• Expected 2Q26 earnings growth for the technology sector+64% y/yNvidia and Micron are expected to contribute about 37% of total earnings growth.

Impact & implications

If clearer evidence of AI commercialization and upward earnings guidance revisions emerge in 2Q26 results, the market may regain confidence in hyperscalers' free cash flow and long-term returns, driving capital away from crowded AI hardware momentum trades and toward high-quality large-cap growth stocks. Conversely, if capex continues to be revised upward but evidence of ROIC and monetization remains insufficient, the market will focus more on financing pressure, terminal margins, and the supply-demand balance of AI infrastructure.

Risks

• AI capex continues to be revised upward while evidence of commercialization, earnings, and ROIC remains insufficient.
• Momentum factors have not fully cleared, and trading in AI hardware and storage may remain volatile.
• Debt and equity financing needs are rising, and the market may reassess hyperscalers' cost of capital and returns on capital.
• Private AI investments revalued to market value create one-off gains, making the quality of EPS revisions harder to assess.
• There is uncertainty around AI infrastructure supply, power constraints, terminal margins, and supply-demand balance.
• Macro volatility, weakening consumer confidence, and military activity could affect 3Q guidance.

What to watch

• Capital spending guidance and AI monetization commentary from Alphabet Inc on 7/22, Microsoft Corp on 7/29, Meta Platforms Inc on 7/29, and Amazon.com Inc on 7/31.
• Comments from Nvidia Corp on 8/26, Broadcom Inc on 9/4, and Micron Technology Inc on 9/23 regarding AI demand, the supply chain, and CY27 expectations.
• Whether hyperscalers provide quantifiable monetization evidence for cloud, advertising, enterprise workloads, token pricing, or compute sales.
• Whether free cash flow begins to improve from 2027 and whether that improvement is sufficient to offset concerns about high capex.
• After about 52% of S&P 500 market cap reports over the next two weeks, the earnings beat rate, revenue beat rate, and direction of EPS revisions.
• Whether guidance from sectors such as energy, healthcare, aerospace & defense, and banks confirms either concentrated growth or broader rotation.