J.P. Morgan 2026 Mid-Year Outlook: The AI Super Cycle Continues, Cash Holdings Should Be Reduced

Written by David, Chaoxiang Research

J.P. Morgan's Wealth Management division issued a mid-2026 outlook report on June 1, advising its high-net-worth clients on how to invest for the second half of the year.

Amid the blockade of the Strait of Hormuz driving up oil prices, a resurgence of inflation, and a shift in the AI narrative from fervor to skepticism, this report is generally characterized by cautious optimism, albeit with adjustments to specific investment allocations.

J.P. Morgan believes that the world’s three major risks—fragmentation, inflation, and AI disruption—are currently overpriced by the market, and the present volatility represents an entry opportunity.

Overall assessment is:

Continue betting on the AI supercycle and U.S. equities, hedge against inflation with real assets and alternative strategies, reduce cash holdings, and focus on emerging markets.

If you hold positions in U.S. tech stocks or are considering adding to or reducing your exposure in the second half of the year, this report’s framework and data are worth reviewing; we have condensed and interpreted the original report, reordering the content by investment relevance.

① The AI supercycle has not ended; the market is overly pessimistic.

The five hyperscalers (Microsoft, Meta, Oracle, Google, and Amazon) are expected to spend over $650 billion in capital expenditures by 2026, an increase of $130 billion from the previous earnings season. AI-related investments contributed 25 basis points to U.S. real GDP growth in 2025. Taiwan’s GDP growth exceeded 7%, the fastest pace since 2010, driven primarily by semiconductor exports. JPMorgan believes the market is pricing in an "AI peak," but the data does not support this narrative.

② However, the financial characteristics of hyperscalers are changing.

Free cash flow is projected to decline from $240 billion in 2024 to an estimated $73 billion by the end of 2026. Microsoft’s forward P/E ratio has dropped from a peak of 35 during the AI boom to 22.5. These companies are transitioning from a “low-capital, high-return” model to a “high-capital, high-investment” one, and the market is still absorbing this shift.

③ SaaS is undergoing a silent massacre beneath the surface.

About half of the components in the S&P Software Index (IGV) have fallen more than 50% from their all-time highs. The basket of "AI-vulnerable names" tracked by JPM has declined nearly 20% this year. Private credit markets have 21% of their exposure in software companies, rising to 40% when including technology and business services. The impact of AI on the subscription-based software business model is already underway.

④ The floor of inflation is higher than before the pandemic, and cash is slowly losing value.

America’s core PCE was already stuck at 3% before the energy shock. Since the 2020s, consumer prices have risen cumulatively by 25%, while core fixed income has returned only 6%. Nearly 20% of JPM’s clients’ assets are held in cash and short-term bonds. The message is clear: you think you’re playing it safe, but you’re actually losing money.

⑤ The blockade of the Strait of Hormuz represents the largest oil supply shock since World War II, but JPM believes it presents a buying opportunity on dips.

Oil prices nearly doubled, U.S. equities experienced a roughly 10% correction, and the S&P 500’s P/E ratio briefly fell below 20x. JPM’s historical data shows that buying after the VIX surpasses 30 results in a positive return 70% to 83% of the time within six months, with an average return of 12.4%.

⑥ Emerging markets may present opportunities in the second half of the year.

EM corporate earnings expectations are growing by 46%, with a P/E ratio of only 11.8x. Taiwan and South Korea are core nodes in the AI hardware supply chain. Latin America holds over 40% of the world’s copper and nearly 60% of its lithium reserves. Chinese stocks are trading at their deepest discount to other Asian markets in 20 years, and Japan’s stance is shifting from cautious to warmer.

JPM begins by saying that Wall Street's narrative around the AI supercycle has become "too pessimistic."

The core data supporting this judgment:

1. The five cloud giants—Microsoft, Meta, Oracle, Google, and Amazon—are expected to collectively spend over $650 billion on capital expenditures by 2026. The cloud rental price for GPUs (the core chips used to train AI models) has risen 40% since last October, and supply still lags behind demand. Nvidia’s stock is trading at a 40% discount to its average P/E ratio over the past decade, as the market prices in peak chip sales, yet its cloud revenue continues to accelerate.

Meanwhile, the financial characteristics of these five companies are shifting. Free cash flow is projected to decline from $240 billion in 2024 to $73 billion by the end of 2026, and Microsoft’s P/E ratio has fallen from its AI-era peak of 35x to 22.5x. The asset-light model that attracted investors over the past decade is being rewritten by heavy capital investments. JPM believes that, at this stage, revenue growth should be prioritized over cash flow—but this also means that if demand slows, these investments could become a burden.

Several other judgments regarding AI serve as localized risk alerts within the broader trend:

Traditional software companies were among the first true victims of AI. About half of the components in the U.S. software sector index have declined more than 50% from their highs, with a median operating profit margin of just 4%. The logic behind this impact is straightforward: SaaS (software-as-a-service) is priced per user, and AI reduces the need for users. This pressure has already spread to the lending market, where approximately 21% of direct lending in the U.S. has been extended to software companies, and publicly traded technology loan funds have fallen to levels near those seen in the previous cycle low. JPMorgan’s stress test shows that, under extreme conditions, leveraged losses could reach 4%, but they do not currently pose a systemic risk.

SpaceX, Anthropic, and OpenAI may go public in bulk this year—a historical pattern that has not been a good omen. In the past 25 largest IPOs, the median new stock underperformed the broader market by 30 percentage points in its first year, with 12 out of 18 declining in that period. Years featuring mega-IPOs saw a median market return of only 3%, far below the long-term average of 10%. JPMorgan did not claim that the market has peaked, but it clearly views SpaceX’s IPO reaction as a barometer of market sentiment.

The key point here is not that the Strait of Hormuz drove up oil prices, but that U.S. inflation had not returned to normal levels before oil prices rose.

In January 2026, core PCE increased by 3.1% year-over-year, with local services such as dining and personal care showing particularly strong gains. Oil prices doubled. The Fed’s model indicates that a $10 per barrel increase in oil prices raises inflation by approximately 0.3 percentage points; this time, prices rose by $40.

JPM believes the full recurrence of the 1970s is unlikely. The labor market has not seen a wage-price spiral, the quit rate is declining, housing inflation has dropped from 5% at the end of 2024 to just over 3%, and China’s excess capacity is also suppressing global commodity prices. However, the floor of inflation is higher than before the pandemic, likely hovering around 3%.

JPM's recommended response is to increase allocations to physical assets.

Since 2020, U.S. prices have risen by 25%, while bonds have returned only 6%, and cash even less. You may think your money is sitting still, but it’s actually losing value every year. At JPMorgan, nearly 20% of its clients’ assets are still held in cash and short-term bonds.

Therefore, its recommendation is to allocate a portion of your funds to inflation-linked assets:

1. Assets that tend to rise with inflation, such as commodities, infrastructure, and real estate, are recommended to make up approximately 5% of your portfolio.
2. Recommended allocation for gold: 3% to 6%.
3. Additionally, hedge funds made 9% in 2022 when both stocks and bonds declined simultaneously, thanks to macro strategies. However, JPM also acknowledged that 94% of its private banking clients have never purchased hedge funds, and 86% have never invested in infrastructure products.

Summarize this section in one sentence:

Inflation may not spiral out of control, but it also won’t return to 2%. If your portfolio still relies on a traditional 60/40 stock-bond allocation plus a large cash position, JPM believes you’re preparing for a world that no longer exists.

This section covers the most diverse topics, from the Middle East conflict to U.S.-China competition to Europe’s challenges. We’ll focus only on those directly relevant to investment decisions.

1. The blockade of the Strait of Hormuz was the largest market shock of the first half of this year. Approximately 20 million barrels of oil pass through this channel daily, accounting for one-fifth of global oil consumption. Following joint U.S.-Israel strikes against Iran, oil prices nearly doubled within days, and European natural gas prices rose nearly 100% in two days. The CEO of Qatar Energy stated that 15% of LNG (liquefied natural gas) capacity could be offline for up to five years. Qatar also supplies about 30% of the world’s helium, a critical component in chip manufacturing; South Korea has already warned of potential shutdowns at chip factories.

JPM believes the conflict is de-escalating, but damage to physical infrastructure and the energy risk premium will not disappear quickly.

Therefore, their advice to investors is to add to U.S. stock positions during the pullback.

In the first half of the year, U.S. stocks fell by approximately 10%, and the S&P 500's price-to-earnings ratio briefly dropped below 20. Historically, buying after the VIX (fear index) surpassed 30 resulted in positive returns over six months in 70% to 83% of cases, with an average gain of 12.4%.

2. China and the U.S. are each building their own ecosystems, and the market may accelerate into two distinct blocs. The U.S. is restricting chip exports to China and coordinating with the Netherlands and Japan to control semiconductor equipment. Meanwhile, China is expanding exports to non-U.S. markets; its investment under the Belt and Road Initiative reached a record high in 2025, with $53 billion invested in Brazil alone, and its total trade volume with Latin America has surpassed that of the U.S. JPM’s assessment is that future investment returns will increasingly depend on which bloc your assets belong to, rather than just the growth of individual companies.

But fragmentation also creates opportunities, especially in emerging markets.

JPM listed several directions:

1. Latin America possesses over 40% of the world's copper and nearly 60% of its lithium, along with abundant reserves of nickel, rare earths, and agricultural resources. Foreign direct investment has doubled over the past two decades, and central banks have demonstrated stronger inflation control than those in developed countries. Politically, the region is shifting toward more pragmatic, business-friendly governments.
2. Oil-rich Gulf nations in the Middle East are using petroleum revenues to build AI data centers; Saudi Arabia has partnered with Blackstone on a $3 billion data center project, with costs 30% lower than in the United States.
3. East Asia (Taiwan, China; South Korea) controls key nodes in the AI hardware supply chain; if AI capital expenditures continue to accelerate, these economies' exports and pricing power will further strengthen.
4. Chinese stocks are trading at their deepest discount to other Asian markets in 20 years; 80% of Chinese consumers are excited about AI products (compared to 38% in the U.S.), and electricity costs are roughly half those in the U.S. JPM’s stance is “cautiously warming”—if policy signals become more clearly pro-business, Chinese equities could undergo a structural revaluation.

In comparison, Europe is JPM’s most conservative market. Electricity prices are two to four times higher than in the U.S., R&D spending accounts for only 2.2% of GDP (compared to 3.6% in the U.S. and 5.2% in South Korea), and venture capital funding is one-tenth the size of that in the U.S.

Energy shocks are again pushing the European Central Bank toward potential rate hikes. JPM recommends buying only defense and infrastructure-related assets in Europe, while avoiding automotive and consumer sectors.

Volatility presents entry opportunities, but adjust your entry strategy.

What you should bet on:

• AI infrastructure chain (chips, optical modules, power), emerging market equities and bonds, physical assets (commodities, infrastructure, gold), defense-related securities, and Chinese AI-themed stocks (cautious position building).

You shouldn't bet on:

• Cash, traditional subscription-based software companies, European automotive and consumer sectors, and a pure 60/40 stock-bond allocation strategy will carry through the second half of this year.

Original research report link:

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

This article is a summary and interpretation of J.P. Morgan Wealth Management’s Mid-2026 Outlook Report. All judgments and recommendations cited herein reflect JPM’s views and do not represent the position of Chaoxiang Research, nor do they constitute any investment advice.

The seller's report is naturally bullish, and JPMorgan is also the investment banking provider for multiple companies mentioned in the report. The value of the report lies in its framework and data, not in any single conclusion. Focus on the logic, not just the direction.

The market carries risks; make decisions independently.

Data sources: J.P. Morgan Wealth Management Mid-Year Outlook 2026 · Bloomberg · FactSet · U.S. Bureau of Labor Statistics · IEA · METR · Renaissance Capital

TideResearch · June 4, 2026