J.P. Morgan ' s Mid-Year Outlook: the AI narrative did not come to a peak, with reduced cash and increased physical assets

Original by David

Introduction:

J.P. Morgan Wealth Management issued a mid-2026 mid-year outlook report on 1 June, which is the equivalent of half the year, telling its high net value clients how to vote in the second half of the year。

AGAINST THE BACKDROP OF THE BLOCKADE IN THE STRAIT OF HORMUZ PUSHING UP OIL PRICES, THE RESURGENCE OF INFLATION, AND THE SHIFT OF NARRATIVE AI FROM FANATICISM TO SUSPICION, THE REPORT IS GENERALLY CAUTIOUSLY OPTIMISTIC, WITH ONLY A CHANGE IN THE SPECIFIC INVESTMENT CONFIGURATION。

J.P. Morgan believes that the three main global risks are being marketed (debrisification, inflation, the subversive nature of AI)Excessive pessimistic pricingThe current shock is precisely the entrance window。

The overall judgement is that:

CONTINUE TO BET ON AI SUPER CYCLES AND U.S. STOCK, USING PHYSICAL ASSETS AND ALTERNATIVE STRATEGIES TO HEDGE INFLATION, REDUCE CASH HOLDINGS AND FOCUS ON EMERGING MARKETS。

The framework and data for this report are worth looking at if you hold the US share of the technology space, or if you are considering the second half of the year, or whether it should be reduced; we have refined and interpreted the original report, reprioritizing it according to investment relevance。

Six key conclusions:

1 AI SUPER-CYCLE IS NOT OVER, MARKETS ARE OVERLY PESSIMISTIC。

The capital expenditures of the five largest Hyperscaler (Microsoft, Meta, Oracle, Google, Amazon) are expected to exceed $65 billion in 2026, up $13 billion from the previous fiscal season. AI has contributed 25 basis points to real GDP growth in the United States in 2025. Taiwan's GDP grew by 7%, the fastest since 2010, and semiconductor exports are the main push. JPM thinks the market is pricing "AI top", but the data does not support this narrative。

However, the financial characteristics of Hyperscaler are changing。

Free cash flows fell from $24 billion in 2024 to $73 billion projected at the end of 2026. Microsoft's Forward P/E fell 22.5 times from the height of the AI age 35. These companies are moving from a "high return on light assets" to a "high investment on heavy assets" and the market is digesting this shift。

3 SaaS is experiencing underwater massacres。

S& about half of the components in the P Software Index (IGV) fell from historical heights by more than 50%. The JPM tracking "AI Vulnerable Mark" basket dropped by almost 20% this year. Twenty-one percent of the private credit market is open to software companies, plus technology and business services up to 40 percent. AI shocks to subscription software business models have already occurred。

4 Inflation is higher at the bottom than before the epidemic, with chronic loss of cash。

THE CORE PCE IN THE UNITED STATES WAS STUCK TO 3% BEFORE THE ENERGY SHOCK. CONSUMER PRICES HAVE INCREASED CUMULATIVELY BY 25 PER CENT SINCE 2020 AND CORE SOLID HARVESTS HAVE EARNED ONLY 6 PER CENT. JPM CLIENTS HAVE NEARLY 20% OF THEIR ASSETS IN CASH AND SHORT-TERM BONDS. THE REPORT IS CLEAR: YOU THINK YOU ARE AVOIDING, BUT YOU ARE LOSING MONEY。

5 THE STRAIT OF HORMUZ BLOCKADE WAS THE LARGEST OIL SUPPLY SHOCK SINCE WORLD WAR II, BUT JPM BELIEVES IT SHOULD BE BOUGHT BEFORE IT FALLS。

The price of oil almost doubled, and the US share went back about 10 per cent, S& the P/E of P 500 fell 20 times. JPM historical data show that VIX buys after breaking 30, and the probability of positive returns within six months is between 70 and 83 per cent, with an average return of 12.4 per cent。

6 Emerging markets may be an opportunity for the second half of the year。

EM BUSINESS PROFITS ARE EXPECTED TO INCREASE BY 46 PER CENT AND P/E BY ONLY 11.8 TIMES. TAIWAN AND KOREA ARE THE CORE NODES OF THE AI HARDWARE SUPPLY CHAIN. LATIN AMERICA HOSTS MORE THAN 40 PER CENT OF THE WORLD'S COPPER AND NEARLY 60 PER CENT OF ITS LITHIUM RESERVES。China's equity discount on other markets in Asia has been the highest in 20 yearsJP'S ATTITUDE IS "CAUTIOUSLY WARM."。

With regard to AI: Market pricing's at the top. JP Morgan thinks it's too early

JPM BEGINS BY SAYING THAT WALL STREET’S SUPER-CYCLICAL NARRATIVE OF AI IS “TOO PESSIMISTIC”。

The core data that underpins this judgment:

Microsoft, Meta, Oracle, Google, Amazon, the five cloud-calculating giants, are expected to spend more than $65 billion on capital in 2026. The cloud lease price of GPU (the core chip of the training IA model) has increased by 40 per cent since last October, and the supply still falls short of demand. Nvidia’s share price is 40% less than the average market surplus of the last decadeThe market is priced at "chip sales top", but the revenues from cloud operations are accelerating。

MEANWHILE, THE FINANCIAL CHARACTERISTICS OF THE FIVE COMPANIES ARE CHANGING. FREE CASH FLOWS FELL FROM $24 BILLION IN 2024 TO THE PROJECTED $73 BILLION AT THE END OF 2026, AND MICROSOFT'S MARKET SHARE FELL 22.5 TIMES FROM ITS HIGH POINT 35 IN THE AI ERA. THE LIGHT ASSET MODEL THAT HAS ATTRACTED INVESTORS OVER THE PAST DECADE IS BEING REWRITTEN BY HEAVY CAPITAL INPUTS。ACCORDING TO JPM, AT THIS STAGE IT IS IMPORTANT TO LOOK AT INCOME GROWTH RATHER THAN CASH FLOWSBut this also means that once demand slows down, these inputs in turn will become a drag。

A FEW OTHER JUDGEMENTS ABOUT AI ARE A LOCAL RISK HINT IN A GENERAL TREND:

TRADITIONAL SOFTWARE COMPANIES ARE THE FIRST REAL VICTIMS OF AI。  U.S.S.S.S.S.S.S.I. has fallen by more than 50% from a high point to a median operating profit of only 4%. The logic of shocks is simple: SaaS (subscribed software) charges heads, AI reduces heads. This has been channelled to the lending market, where about 21 per cent of the US direct lending market has been loaned to software companies, and publicly traded science and technology loan funds have fallen to near the low of the previous cycle. JPM pressure tests indicate that leverage losses may be up to 4 per cent in extreme cases, but do not pose a systemic risk for the time being。

SpaceX, Anthropic, OpenAI may be piling up this year, which is not a good sign in history。  After 25 of the largest IPOs in the past, the new median lost 30 percentage points in the first year, and only 12 fell in the first year. In the year when the IPO was super-large, the median number of years on the large disc was only 3%, well below the long-term average of 10%. JPM does not say it's going to top, but explicitly looks at SpaceX's listed reaction as a periodic thermometer。

On inflation: less than 2%, you're losing cash and bonds

This part of inflation is not about pushing up oil prices in the Straits of Hormuz, but before they are pushing up oil pricesInflation in the United States has not returned to normal levels。

THE CORE PCE IN JANUARY 2026 WAS 3.1 PER CENT, AND THE LOCAL SERVICES SUCH AS CATERING, PERSONAL CARE, ETC., WERE PARTICULARLY STRONG. OIL PRICES THEN DOUBLED. THE FEDERAL RESERVE MODEL SHOWS AN INCREASE OF ABOUT 0.3 PERCENTAGE POINTS IN INFLATION FOR EVERY $10 BARREL INCREASE IN OIL PRICES, THIS TIME BY $40。

JPM BELIEVES THAT THERE IS LITTLE CHANCE OF A FULL RE-ENACTMENT IN THE 1970S. THERE IS NO WAGE-PRICE SPIRAL IN THE LABOUR MARKET, ACTIVE EXIT RATES ARE DECLINING, HOUSING INFLATION HAS FALLEN FROM 5 PER CENT AT THE END OF 2024 TO 3 PER CENT IN THE FIRST PLACE, AND CHINA’S EXCESS CAPACITY IS LOWERING GLOBAL COMMODITY PRICES. BUT INFLATION IS AT THE BOTTOM, ROUGHLY 3% HIGHER THAN BEFORE THE OUTBREAK。

THE JPM RESPONSE IS TO INCREASE THE PHYSICAL ASSET ALLOCATION。

UNITED STATES PRICES HAVE INCREASED BY 25 PER CENT SINCE 2020, AND BONDS HAVE EARNED ONLY 6 PER CENT AND LESS CASH. YOU THINK THE MONEY'S NOT MOVING, IT'S SHRINKING EVERY YEAR. OF ITS OWN CLIENTS, JPM HAS NEARLY 20 PER CENT OF ITS ASSETS IN CASH AND SHORT-TERM BONDS。

So its proposal is to move a portion of the money to inflation-linked assets:

1. Large commodities, infrastructure, real estate, which will follow price increases, are suggested to be combined to about 5 per cent of the portfolio。
2. Gold is recommended separately between 3% and 6%。
3. AND THE HEDGE FUND, WHEN EQUITIES AND BONDS WENT DOWN TOGETHER IN 2022, MADE 9 PERCENT OF THE HEDGE FUND THAT MADE THE MACRO-STRATEGY. HOWEVER, JPM ALSO ADMITTED THAT 94 PER CENT OF ITS PRIVATE BANK CLIENTS HAD NEVER BOUGHT HEDGE FUNDS, AND 86 PER CENT HAD NOT PURCHASED INFRASTRUCTURE-TYPE PRODUCTS。

One sentence summarizes this part:

INFLATION MAY NOT BE OUT OF CONTROL, BUT IT WILL NOT RETURN TO 2%. IF YOUR PORTFOLIO IS STILL THE TRADITIONAL SIX-FOUR-SHARE RATIO PLUS A BUNCH OF CASH, JPM THINKS YOU'RE PREPARING FOR A WORLD THAT NO LONGER EXISTS。

On geometry: China's stock market may be subject to structural revaluation

This part covers the most diverse areas, from the Middle East conflict to Central America to Europe's plight. We will only choose what is directly relevant to investment decisions。

1. The Strait of Hormuz blockade was the biggest market shock in the first half of the year。  about 20 million barrels of oil per day pass through this route, accounting for one fifth of global oil consumption. Oil prices nearly doubled in a few days, and European gas prices rose by nearly 100 per cent in two days, after US-led strikes against Iran. Qatar’s energy CEO said that 15% of LNG production could be out of line for up to five years. Qatar also supplies about 30 per cent of the world ' s helium, which is essential for chip manufacturing, and Korea has warned of the possible shutdown of the chip factory。

JPM BELIEVES THAT THE CONFLICT IS BEING DOWNGRADED, BUT THE DAMAGE TO PHYSICAL FACILITIES AND THE RISK PREMIUM ON ENERGY WILL NOT SOON DISAPPEAR。

So their advice to investors is:Go back to Kalurami。

In the first half of the year, the US stock fell by about 10 per cent, S& the P 500 rate fell 20 times. In history, the VIX (Hazing Index) broke 30 and then bought six months of positive earnings, 70 to 83 per cent and on average 12.4 per cent。

China and the United States are in the process of establishing their own ecology, and the market could accelerate its division into two camps。  The United States is restricting exports of Chinese chips, pulling together the Netherlands and Japan for semiconductor equipment. China is expanding its exports to non-United States markets. In 2025, China made an all-time high in terms of investment. JPM's judgment is that future returns on investment may increasingly depend onWhat camp do you have, not just the growth of the company itself。

However, fragmentation is also creating opportunities, especially in emerging markets。

JPM LISTS SEVERAL DIRECTIONS:

1. Latin AmericaMore than 40 per cent of the world's copper and nearly 60 per cent of the lithium, nickel, rare earth and agricultural resources. Foreign direct investment has doubled over the past two decades, central banks are better able to control inflation than developed countries and are moving politically towards more pragmatic pro-business government。
2. Middle East Gulf StatesIN THE CONSTRUCTION OF THE AI DATA CENTRE WITH OIL REVENUES, SAUDI ARABIA COOPERATED WITH BLACKSTONE ON A $3 BILLION DATA CENTRE PROJECT AT A 30 PER CENT LOWER COST THAN THE UNITED STATES。
3. East Asia(TAIWAN, CHINA, SOUTH KOREA) MASTERS KEY NODES IN THE AI HARDWARE SUPPLY CHAIN, AND EXPORT AND PRICING RIGHTS IN THESE ECONOMIES WILL CONTINUE TO INCREASE IF AI CAPITAL SPENDING CONTINUES TO ACCELERATE。
4. Chinese equitiesTHE PRICE DISCOUNT FOR OTHER MARKETS IN ASIA HAS REACHED ITS HIGHEST IN 20 YEARS, 80 PER CENT OF CHINESE CONSUMERS ARE EXCITED ABOUT AI PRODUCTS (38 PER CENT IN THE UNITED STATES), AND ELECTRICITY COSTS ARE ABOUT HALF THE COST IN THE UNITED STATES. JPM'S ATTITUDE IS TO “SWEETLY WARM UP” AND “SWEETLY WARM”If there are clearer pro-business signals on the policy front, the Chinese stock market may be subject to a structural reassessment。

BY CONTRAST, EUROPE IS THE MOST CONSERVATIVE MARKET FOR JPM。& nbsp; Electricity is two to four times the price of the United States, R & D expenditure is only 2.2 per cent of GDP (3.6 per cent in the United States and 5.2 per cent in the Republic of Korea) and wind investment is one tenth of that of the United States。

THE ENERGY SHOCK IS FORCING THE ECB TO RE-INTRODUCE. IN EUROPE, JPM ONLY RECOMMENDED THE PURCHASE OF DEFENSE AND INFRASTRUCTURE-RELATED TARGETS, AVOIDING CARS AND CONSUMPTION。

JPM, WHAT'S IN CUSTODY, WHAT'S NOT

Putting the 60 page report to one sentence:The shock is an entry opportunity, but the entry position is changing。

You should bet:

• AI INFRASTRUCTURE CHAIN (CHIP, LIGHT MODULE, ELECTRICITY), EMERGING MARKET STOCKS AND BONDS, PHYSICAL ASSETS (LARGE COMMODITIES, INFRASTRUCTURE, GOLD), DEFENCE-RELATED TARGETS, CHINA AI CONCEPT (CAUTIONARY SILO)。

You shouldn't have:

• Cash, traditional subscription software companies, European automobiles and consumption, and investment patterns based solely on the 64-sum equity debt cover the second half of the year。

Researched original links:

https://www.jpmorgan.com/content/dam/jpmorgan/documents/health-manage/mid-year-outlook-2026.pdf