J.P. Morgan: The fading of AI momentum has entered a mature phase, but prolonged weakness in global equities is not expected

Overview

This is a J.P. Morgan global equity strategy report focused on whether the recent sharp correction in AI-related stocks, Korea, and the semiconductor sector will drag down global equities. The report’s conclusion is positive: the fading of AI momentum and momentum factors has entered a mature phase, and while market rotation will bring volatility, it is unlikely to cause a prolonged decline. Supporting factors include still-strong semiconductor earnings, falling inflation, reduced hawkish central bank pressure, faster market digestion of geopolitical shocks, and a strong start to the Q2 earnings season.

Core views

The report’s main view is to continue supporting equity exposure and add on geopolitically driven pullbacks. The authors believe market leadership is broadening from a small number of AI winners to a wider set of cyclical sectors, and that this broadening will continue in 2H. Although semiconductors are being dragged down in the short term by technical factors and position unwinds, supply-demand and earnings fundamentals remain supportive, RSI is close to oversold, and if hyperscaler capex guidance stays strong, investors should reallocate to the sector over the summer. In contrast, the AI-disrupted basket, such as Software, Business Services, and Media, remains fundamentally bearish in the report’s view. Regionally, Eurozone EPS revisions have improved consecutively and have caught up with the U.S., leading the report to prefer the Eurozone over the U.S.

Analysis framework

The report combines top-down macro judgment, market technicals, earnings revisions, earnings reactions, relative valuation metrics, and a sector allocation framework. It breaks the recent pullback in AI-related stocks into three factors—technical de-positioning, valuation adjustment, and fundamental concerns—and then uses inflation, bond yields, central bank expectations, geopolitical shocks, and Q2 earnings to assess whether it will become a systemic equity market downturn.

Methodology notes

• Market style and factorsMomentum factor drawdown analysis

  Momentum unwind

  The report looks at the S&P 500 Momentum factor Long-Short, RSI, and technical positioning, and concludes that the momentum factor has given back a large portion of its year-to-date gains and that crowded-position risk has declined.

• Sector allocationCyclicals relative to Defensives

  Broadening market leadership

  The report argues that falling inflation, improving real incomes, and broader earnings growth will support continued outperformance of Cyclicals over Defensives; cyclical sectors in the U.S. and Europe have already outperformed defensive sectors by about 5% to 7% year-to-date.

• Macro comparisonPre-Iran Conflict vs 2022

  Inflation shock comparison framework

  The report compares the current energy shock with 2022 and argues that wage growth, inflation expectations, corporate pricing power, and the policy starting point are all different this time, implying lower risks of stagflation and de-anchored inflation expectations.

• Earnings revisionsEPS revisions ratio

  Eurozone earnings catch-up

  The report uses the Eurozone-to-U.S. EPS revision ratio to assess earnings momentum, noting that Eurozone revisions have fully caught up with the U.S. for the first time since January 2025.

Asset mapping & comparison

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

• Global equities

  Overall bullish

  Strengths

  Falling inflation, strong earnings, reduced positioning pressure, and broadening market leadership.

  Weaknesses

  Pullbacks in AI and momentum trades are creating short-term volatility, and geopolitical conflict may still flare up repeatedly.

  Comparison

  More attractive than a scenario of rising bond yield pressure, because the report expects yield pressure to ease.

  Risks

  If inflation rises again or central banks turn more hawkish, valuation support may weaken.

• Semiconductors

  Tactical opportunity to add exposure

  Strengths

  Continued tight DRAM/NAND supply-demand conditions, support from data center capex, strong earnings resilience, and RSI close to oversold.

  Weaknesses

  SOX and memory stocks have corrected sharply recently, with investors concerned about overcapacity and competition from Chinese suppliers.

  Comparison

  Has stronger fundamental support than AI-disrupted sectors.

  Risks

  If hyperscaler capex guidance weakens or supply is released earlier than expected, the stabilization thesis for the sector would be damaged.

• Cyclicals

  Preferred relative to Defensives

  Strengths

  Cyclical sectors in the U.S. and Europe have already outperformed defensive sectors year-to-date, and earnings and the macro backdrop support continued broadening.

  Weaknesses

  Consumer subsectors have lagged materially before, and the recovery still needs confirmation.

  Comparison

  Better than Defensives because market leadership is broadening and inflation pressure is easing.

  Risks

  If economic growth slows or oil prices push up inflation, cyclicals could come under pressure again.

• Eurozone equities

  Preferred relative to the U.S.

  Strengths

  EPS revisions have accelerated consecutively and caught up with the U.S.; fiscal impulse, industrial and defense demand, and a softer EUR support exporters.

  Weaknesses

  More sensitive to renewed escalation of the Iran conflict and to the recovery in global trade.

  Comparison

  The report believes the Eurozone has an earnings catch-up opportunity relative to the U.S.

  Risks

  If geopolitical conflict continues to escalate in 2H, the Eurozone earnings uptrend may be hindered.

• Software、Business Services、Media

  Avoid or bearish

  Strengths

  Valuations of some individual stocks may already have adjusted downward.

  Weaknesses

  The report views these as AI cannibalisation groups, with business models and earnings pressured by AI substitution.

  Comparison

  Weaker than semiconductors and the AI infrastructure beneficiary chain.

  Risks

  If AI monetization pathways improve or certain companies prove their defensibility, the bearish view may be revised.

• Energy equities

  Avoid

  Strengths

  Geopolitical conflict may support oil prices in the short term.

  Weaknesses

  The report focuses more on the positive impact of lower oil prices on easing inflation and the broader equity market.

  Comparison

  Less attractive in allocation than cyclicals, banks, and semiconductors.

  Risks

  If Brent surges again because of conflict, energy may outperform in the short term and inflation pressure may rise.

Key data

• KOSPI decline from recent peakabout -25%Mainly dragged down by large memory companies.
• SOX decline from peakabout -20%The semiconductor index has corrected sharply in the short term.
• Year-to-date relative performance of AI at risk basketsstill underperforming by 20%+The report remains bearish on AI-disrupted sectors such as Software, Business Services, and Media.
• U.S. headline CPI three-month annualizedfell from 8.2% in May to 2.8% in JuneThe report believes inflation has started to peak, which is favorable for lower yields and broader market leadership.
• U.S. 5Y5Y inflation forwardremains within a 25bp range and has not broken above 2.60%Indicates that long-term inflation expectations remain under control.
• Proportion of reported S&P 500 companies beating EPS expectationsabout 97%Above the long-term average of 76%.
• Median same-day performance of U.S. EPS beatersabout 1.6%The table shows about 1.7% relative to the S&P 500.
• Median same-day performance of Stoxx 600 EPS beatersabout 2.1%Average performance is about 2.4%, and about 2.3% relative to the Stoxx 600.
• MSCI Eurozone EPS revisionscurrently 18%, versus -5% in Jan'26, a change of 22%Shows that Eurozone earnings revisions have improved significantly.
• Change in Materials EPS revisions83%A relatively large improvement among Eurozone first-level industries.
• Change in Staples EPS revisions91%Improvement has also appeared in defensive sectors.

Impact & implications

The implication for portfolios is that the recent AI and momentum pullback should not simply be viewed as a signal to exit equities, but rather as a process of the market broadening from crowded trades toward wider earnings improvement. The report recommends maintaining equity risk exposure, adding on declines triggered by geopolitics, watching for tactical buy points after semiconductor pullbacks, and increasing relative preference for cyclicals, banks, and Eurozone equities. From a risk-control perspective, it is necessary to distinguish between the AI infrastructure beneficiary chain and the AI-disrupted chain: the former may stabilize on earnings and supply-demand support, while the latter still faces long-term pressure on business models.

Risks

• If the Iran conflict continues to escalate in 2H, it may push Brent and inflation expectations higher again.
• If hyperscaler capex slows, it will weaken semiconductor demand and the earnings support of the AI infrastructure chain.
• If AI chips and memory see overbuilding or intensifying competition from Chinese suppliers, it may pressure the pricing power and margins of Korean memory manufacturers.
• If inflation fails to continue falling or central banks remain hawkish, bond yield pressure will weigh on equity valuations.
• AI-disrupted sectors may continue to drag on the performance of industries such as Software, Business Services, and Media.
• Market rotation and leverage-ETF-related trading may continue to amplify short-term volatility.

What to watch

• Whether hyperscalers’ capex guidance remains strong.
• DRAM and NAND prices, the timeline for supply increases, and changes in HBM demand.
• Follow-up readings of U.S. headline CPI, core CPI, core PCE, and Eurozone inflation.
• Brent oil prices and signals of escalation or de-escalation in the Iran conflict.
• Whether the U.S. 2-year yield, Fed funds futures, and 5Y5Y inflation forward continue to decline or remain stable.
• The proportion of Q2 earnings season companies beating EPS expectations, and whether post-beat stock price reactions remain positive.
• Whether Eurozone EPS revisions can continue to lead, or at least maintain convergence with the U.S.
• Performance of Cyclicals relative to Defensives, the Eurozone relative to the U.S., and Semiconductors relative to the broader market.