JPMorgan Cools Enthusiasm: Tech Stocks Take Back Seat in Second Half, Warns of 'AI Cannibalization Areas'

JPMorgan Chase (JPM-US) has indicated that technology stocks may struggle to remain the primary driver of equity market gains in the second half of this year.

A strategy team led by Mislav Matejka stated in a report on Monday (3rd) that stocks linked to the technology and artificial intelligence sectors are unlikely to replicate the dominant market performance seen in the second half of 2025. One reason is their expectation that the "Magnificent Seven" U.S. mega-cap tech stocks will no longer dominate market returns, with investor focus potentially shifting gradually toward other industries.

The strategists also urged investors to remain cautious about so-called "AI cannibalization areas," particularly software, business services, and media sectors. They believe that although these sectors have shown resilience amid AI threats, they will continue to face challenges in the long run. However, given the significant corrections already experienced, there may be room for tactical rebounds in the near term.

Indeed, concerns that AI could fundamentally disrupt the business models of software companies have triggered notable sell-offs in related stocks since January.

In terms of portfolio allocation, JPMorgan's strategists currently show a preference for semiconductor stocks over hyperscalers and businesses vulnerable to AI disruption, especially considering that AI-related spending may continue to rise.

Nevertheless, the bank expects cyclical stocks to lead market performance in the second half, with consumer cyclicals also poised for relatively stronger performance.

JPMorgan continues to view positively the broadening of market leadership and highlights several key drivers for equity markets in the second half. First, the U.S. economy may prove resilient enough to withstand the impact of the Iran conflict.

Second, markets anticipate that the Federal Reserve (Fed) will "maintain a dovish stance for as long as possible." Before the conflict erupted, markets were pricing in Fed rate cuts, but those expectations have since receded significantly. Nonetheless, strategists believe that if inflation cools meaningfully over the coming months, the Fed could shift toward a more accommodative policy stance.

Additionally, strong corporate earnings in the second quarter and relatively attractive valuations in markets outside the U.S. are expected to support equities. According to JPMorgan, the current average price-to-earnings (P/E) ratio for U.S. stocks stands at 20.2x, 21% above the 20-year median—indicating clearly elevated valuations. In contrast, the UK equity market is only 5% above its historical average, while Japan’s is 18% higher.

The strategists stated: "If our view on continued broadening of market participation in the second half proves correct, the Iran conflict does not escalate further, and skepticism around AI commercialization persists, the probability of non-U.S. markets outperforming U.S. equities for a second consecutive year will increase."

Finally, JPMorgan notes that investors may have already reduced excessive exposure to crowded trades such as popular semiconductor stocks, helping these sectors stabilize gradually. A reassuring sign for them is that despite a sharp correction in the momentum factor—with South Korea’s KOSPI index plunging nearly 40% at one point—the semiconductor sector has maintained its resilience.