The unwind in artificial intelligence and momentum stocks is entering its maturing stage and should not trigger prolonged market weakness, according to JP Morgan.
The bank's equity strategists, led by Mislav Matejka, noted a challenging few weeks for AI-linked groups, with Korea's market down 25% from last month's high and the SOX semiconductor index off 20%.
Individual stocks, including Samsung and Micron, have fallen anywhere between 20% and 50%.
The Magnificent Seven's performance relative to the wider market has stabilised of late but still lags on the year, while baskets of stocks deemed at risk from AI continue to underperform by more than 20% year to date.
Despite drawdowns of over 20% among many heavyweights, JPM found it encouraging that the MSCI World index is holding within 1% to 2% of its all-time highs.
The bank argued AI groups should not keep falling in absolute terms for long, given a likely continued strong earnings uplift and growing valuation support.
Semiconductors in particular should soon find a bid, it said, as meaningful supply additions are not due before 2028, making it too early to price in a cyclical inflexion.
JPM remains a proponent of rotation and broadening market leadership in the second half, while keeping medium-term concerns over the monetisation of hyperscalers' extreme capital spending surge.
It stays fundamentally bearish on software, business services and media, the groups most exposed to AI cannibalisation.
The strategists also flagged that inflation rates have started to peak in the latest prints, which could bring lower bond yields, less hawkish central banks and a weaker dollar, all supportive of broader leadership.
Inflation remains sensitive to Brent crude and developments in Iran, but the bank sees no de-anchoring of expectations and has argued since March to buy geopolitics-driven dips.
Early second-quarter results are coming in strong, with aggregate share price reactions to beats positive in both the US and Europe, despite some notable fades in technology.
Eurozone earnings revisions have accelerated for 15 straight weeks, fully closing the gap with the US for the first time since January 2025.
