AI sell-off is maturing and earnings will provide a floor, says leading US bank

• Despite drawdowns exceeding 20% in many AI heavyweights, the MSCI World index remains within 1-2% of all-time highs, suggesting broad market resilience
• JPM expects semiconductors to find support soon as meaningful supply additions are not due before 2028, making it too early to price in a cyclical downturn
• Early Q2 results are strong and Eurozone earnings revisions have accelerated for 15 consecutive weeks, fully closing the gap with the US for the first time since January 2025

Summary

JP Morgan Analysis: AI Sell-Off Maturing

JP Morgan's equity strategists, led by Mislav Matejka, assess that the artificial intelligence and momentum stock sell-off is entering a mature phase and unlikely to trigger prolonged market weakness.

Key Market Movements:

• Korea's market down 25% from last month's high
• SOX semiconductor index declined 20%
• Individual stocks (Samsung, Micron) fell 20-50%
• Magnificent Seven stocks lag year-to-date despite recent stabilization
• AI-risk stock baskets underperforming by over 20% YTD
• MSCI World index holding within 1-2% of all-time highs

Investment Outlook:

JPM believes AI stocks should stabilize soon, supported by continued strong earnings growth and improving valuations. The bank sees semiconductors finding support particularly, noting meaningful supply additions aren't expected until 2028—too early for cyclical pricing.

Strategic Positioning:

The bank advocates for rotation and broader market leadership in H2 2026, while maintaining medium-term concerns about hyperscalers' capital spending monetization. JPM remains bearish on software, business services, and media sectors most vulnerable to AI disruption.

Macro Environment:

Inflation appears to be peaking in recent data, potentially leading to lower bond yields, less hawkish central banks, and a weaker dollar—all supporting broader market leadership. Early Q2 results show strength, with Eurozone earnings revisions accelerating for 15 consecutive weeks, matching US performance for the first time since January 2025.

The bank recommends buying geopolitics-driven dips, particularly those related to crude oil and Iran developments.