Global AI trade could revive after recent pullback, J.P. Morgan says

• Global semiconductor stocks have surged 48% year-to-date versus only 1.3% for software stocks, reflecting diverging sector performance
• J.P. Morgan recommends a 'semis vs software pair trade', betting on semiconductors outperforming software due to healthy pricing growth through 2027 and tight supply conditions until 2028
• AI stocks initially rallied in early 2026 but weakened on concerns about capital expenditure spending and immediate returns, though the firm expects earnings strength and AI monetization evidence to support recovery

Summary: Global AI Trade Poised for Revival After Pullback, J.P. Morgan Says

J.P. Morgan analysts, led by Mislav Matejka, indicated Monday that the recent AI sector pullback has created favorable conditions for renewed investor engagement, particularly in semiconductor stocks.

Key Investment Thesis:

The brokerage notes that investor positioning has improved, valuations have declined significantly, and capital expenditure is expected to remain robust despite recent slowdown concerns. Continued earnings strength and growing evidence of AI monetization should support sector recovery.

Market Performance:

AI stocks rallied early in 2024 but weakened amid concerns over capital spending and immediate returns. The MSCI World Semiconductors and Semiconductor Equipment Index has surged approximately 48% year-to-date, while the MSCI World Software and Services Index has gained only 1.3%.

Sector Outlook:

• Semiconductors (Bullish): J.P. Morgan maintains a positive stance citing healthy fundamentals, pricing growth extending into 2027, and tight supply-demand conditions expected to persist until 2028.
• Software (Cautious): The firm expresses caution as AI growth clouds long-term outlook amid intensifying competition. While not recommending outright shorts given the sector's dramatic de-rating, analysts suggest a semiconductor versus software pair trade.

Strategic Recommendation:

J.P. Morgan anticipates improved trading conditions ahead driven by earnings strength and reduced macroeconomic volatility. The analysts acknowledge that tech may not return to previous success levels but emphasize the fundamental case remains constructive with ample opportunities within the AI ecosystem.

The analysis comes as the sector navigates concerns about rapid AI development and return on investment, suggesting a selective approach favoring hardware over software exposure.