JPMorgan: AI Monetization Doubts Persist, Magnificent Seven May Struggle to Lead Market Gains in Second Half as Capital Shifts to Cyclical Stocks

JPMorgan (JPM-US) has released its latest strategy report indicating that tech stocks are unlikely to continue serving as the primary drivers of global equity market gains in the second half of this year. The bank believes that market skepticism regarding the substantial AI capital expenditures by hyperscale cloud providers will not dissipate in the short term, leaving industries such as software—more susceptible to AI disruption—under continued selling pressure. Meanwhile, capital is expected to gradually shift toward cyclical equities and markets outside the United States.

A team led by strategist Mislav Matejka stated in a report issued Monday that, unlike the broad dominance of AI-related stocks in the second half of 2025, tech and AI-linked equities are likely to struggle to maintain their leadership position this year.

The report notes that the "Magnificent Seven"—Alphabet (GOOGL-US), Amazon (AMZN-US), Apple (AAPL-US), Meta Platforms (META-US), Microsoft (MSFT-US), NVIDIA (NVDA-US), and Tesla (TSLA-US)—will likely continue facing market scrutiny over whether their massive capital outlays can generate commensurate returns.

JPMorgan also warns investors to remain cautious about sectors most exposed to the so-called "AI cannibalization effect," including software, enterprise services, and media. While acknowledging that some companies still demonstrate operational resilience, the report argues that they will ultimately find it difficult to escape long-term competitive pressures from AI. However, after significant price corrections, these stocks may experience short-term technical rebounds.

Amid concerns that AI could disrupt existing business models, software stocks have been under continuous sell-off since January. The iShares Expanded Tech-Software Sector ETF (IGM-US), which tracks the software industry, has declined nearly 11% year-to-date, while the Roundhill Magnificent Seven ETF (MAGS-US), tracking the tech giants, has remained nearly flat.

Regarding sector positioning within technology, JPMorgan continues to favor semiconductors over hyperscalers and AI-vulnerable businesses. The bank expects AI-related investment spending to keep rising, benefiting the semiconductor industry. However, it forecasts that cyclical stocks will become the dominant market force in the second half, with consumer cyclicals expected to outperform the broader market.

JPMorgan maintains its prior view that leadership in U.S. equities should broaden beyond a narrow group of large-cap tech stocks. The report identifies several factors that could support global equity markets in the second half.

First, the U.S. economy is expected to remain resilient despite geopolitical tensions such as the Iran conflict. Second, the Federal Reserve (Fed) is likely to maintain an accommodative stance for as long as possible. Before the Middle East crisis erupted, markets had already priced in rate cuts, which later retreated somewhat. But if inflation cools significantly over the coming months, the Fed could revert to a more dovish policy stance.

Additionally, strong Q2 corporate earnings and relatively cheaper valuations in non-U.S. equity markets are seen as supportive factors for equities.

Citing data, JPMorgan notes that the current average price-to-earnings (P/E) ratio for U.S. stocks is approximately 20.2x, 21% above the 20-year historical median—still considered expensive. In contrast, the UK equity market is only about 5% above its historical median, and Japan’s is 18% higher, suggesting lower valuation pressure in these regions.

The report concludes that if market participation continues to broaden, the Middle East situation does not worsen further, and skepticism over AI’s commercialization ability persists, non-U.S. equity markets could outperform U.S. stocks for a second consecutive year.

JPMorgan also observes that crowded trades in the market have notably cooled, with excessive investor positioning in popular semiconductor stocks largely adjusted, helping the semiconductor sector stabilize gradually.

The bank notes that momentum trading rapidly cooled over the past 4–6 weeks, with South Korea’s KOSPI index plunging roughly 40% and the Philadelphia Semiconductor Index (SOX) falling about 30%, before rebounding last Friday. Nevertheless, major global indices—including the MSCI World Index, S&P 500, and pan-European STOXX 600—remain within 1% of their all-time highs, underscoring the overall resilience of global equity markets.