J.P. Morgan sees AI trade re-engagement as semiconductor valuations turn more attractive

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JP Morgan on AI semiconductor valuations

Highlights

J.P. Morgan states that recent declines in global AI trade have lowered semiconductor valuations, making the sector more attractive for renewed investor positioning.
The brokerage maintains a bullish stance on semiconductor stocks, citing robust fundamentals, pricing growth through 2027, and supply-demand tightness expected until 2028.
MSCI World Semiconductors and Semiconductor Equipment Index gained 48% year-to-date versus only 1.3% for the MSCI World Software and Services index, underscoring performance divergence.

Brokerage outlook points to renewed semiconductor interest

As reported by Reuters, J.P. Morgan analysts say the recent retreat in the global AI trade improves investor positioning, lowers valuations across most parts of the sector and could help drive a fresh re-engagement with the theme.

In a note led by Mislav Matejka, the analysts say technology may not return to its previous level of outperformance, but the fundamental case remains constructive and still offers multiple opportunities within the AI ecosystem. The brokerage adds that capital spending is likely to stay strong despite recent worries about a slowdown, while continued earnings strength and growing signs of AI monetization should support renewed investor interest.

J.P. Morgan also says trading conditions could improve as macroeconomic volatility eases. It keeps a bullish view on semiconductor stocks, citing healthy fundamentals, pricing growth extending into 2027 and supply-demand conditions that are likely to remain tight until 2028.

Software remains a weaker point in the AI market

The bank is more cautious on software, saying AI-driven growth continues to cloud the sector's longer-term outlook as competition intensifies. It says software is not an attractive outright short after a dramatic de-rating, but argues that a semiconductors-versus-software pair trade should be re-entered.

Market performance this year reflects that divergence. The MSCI World Semiconductors and Semiconductor Equipment Index rises about 48% so far this year, while the MSCI World Software and Services index gains only 1.3%.

Our earlier coverage of XLK’s potential breakout highlighted how large-cap technology was regaining influence over the broader U.S. equity market as the sector tested a bullish inverse head-and-shoulders setup. We noted that tech’s heavy weight in the S&P 500 could bolster index leadership, but also flagged the risk of weakening market breadth if the equal-weight S&P 500 continued to lag and the breakout failed.

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