JPMorgan: Global Stocks Face Summer Pullback, AI Not the Sole Driver

JPMorgan's global equity strategy team, led by chief strategist Mislav Matejka, has cautioned investors about a potential temporary pullback or 'summer swoon' in global stock markets during the warmer months. However, the bank also projects significant upside potential in the second half of the year, particularly for international and emerging markets. Despite artificial intelligence (AI) having dominated recent market performance, JPMorgan emphasizes that it is unlikely to be the sole factor shaping markets over the next six months.

This outlook is underpinned by a combination of macroeconomic and market dynamics. The bank's strategists note the continued resilience of economies despite geopolitical conflicts, such as those in the Middle East. They suggest that as the impact of geopolitical tensions is increasingly priced out, it could reverse the upward trends seen in oil prices, inflation rates, bond yields, and the US Dollar Index (DXY). Furthermore, central banks have largely refrained from aggressive tightening cycles amid economic growth, a trend that is not expected to change dramatically.

JPMorgan's analysis also indicates that inflation expectations are not anticipated to become 'unanchored,' and the recent spike in bond yields is unlikely to continue. Strong corporate earnings are highlighted as another key driver for equities. While valuations in the U.S. appear stretched, international equity markets are becoming more attractive. For instance, Taiwan's forward price-to-earnings ratio has increased by 11% since the start of the conflict, Italy's by 1.5%, and Spain's by 0.6%. A rebound in Eurozone earnings is also expected this year.

Investors are maintaining a cautious stance, with ample cash reserves available to capitalize on any market dips, which are often common during the summer months, according to JPMorgan. This positioning could provide support for markets during potential corrections. The bank expresses a positive view on basic resources and gold (GC00, XAUUSD), suggesting that recent weakness presents an opportunity to add to positions. They also highlight Korean stocks (KR:180721) as attractive, with recent pullbacks offering buying opportunities.

However, the strategists also point to a notable divergence within AI-related stocks. JPMorgan warns that the growing split between AI hardware stocks and companies making heavy AI capital expenditures is reminiscent of the dynamics observed before the dot-com bubble burst in 1999. While hardware-focused indices like the PHLX Semiconductor Sector Index (SOX) have seen significant rallies, some of the 'Magnificent Seven' big tech stocks, such as Microsoft (MSFT) and Meta Platforms (META), have experienced declines. This divergence raises the risk of a broader rotation or pullback if questions regarding AI monetization persist.