JPMorgan strategists believe technology stocks will regain some of the momentum lost since the end of the first half of the year, as crowding in positioning eases, earnings remain strong, and valuations become more realistic, giving investors a reason to re-engage with the sector.
In a report published on Monday, the team led by Mislav Matejka wrote that the pause in the rally over the past three months has left positioning cleaner and share prices less expensive, and that rising capital expenditure and continued strong earnings "should support investors re-engaging with the sector."
Tech stocks are still the standout leaders on the S&P 500 this year, but the rally has cooled in recent months amid market concerns that massive AI spending may not deliver the returns optimists have assumed. Within the tech sector, the valuations of the U.S. "Magnificent Seven" are at their lowest level in a decade, while semiconductor stocks are emerging from a difficult stretch — a slump made worse after Anthropic's Dario Amodei and OpenAI's Sam Altman previously called for a coordinated slowdown in advanced AI development.
"We doubt there will ultimately be a meaningful slowdown, because this remains an existential, winner-takes-all race," Matejka wrote. JPMorgan said that while the kind of gains seen in the first half are unlikely to be repeated, opportunities still exist.
The view that Magnificent Seven valuations are at a ten-year low is not unique to JPMorgan. Data from Morgan Stanley Wealth Management's Global Investment Committee show that the valuation premium of the "Magnificent Seven" relative to the other 493 stocks in the S&P 500 is currently just 10%, the lowest level in more than a decade, even as the seven giants as a group still enjoy an earnings growth advantage of about 45%.
Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, wrote in a report: "By comparison, we think these hyperscale cloud giants now look simply too cheap."
Take Nvidia as an example: its forward price-to-earnings ratio for the next 12 months is only 18.7 times, compared with a historical average forward P/E of 36.9 times. Bank of America Securities semiconductor analyst Vivek Arya reiterated a "buy" rating, arguing that the current forward P/E of 18 times is at a seven-year low and represents an "excellent opportunity to add to positions."
Matejka said a renewed wave of enthusiasm for tech stocks should boost the South Korean stock market, where both Samsung Electronics and SK Hynix are listed, and indirectly benefit emerging-market equities. "Given the huge weighting of tech, better tech performance would clearly be a help to the market," he said. "That said, we don't think it is essential, and the market may not need AI to outperform in order to keep moving higher."
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