The global artificial intelligence trade is poised for a potential rebound following a recent downturn, driven by improved investor sentiment and lower stock valuations. According to analysts at J.P. Morgan, led by Mislav Matijević, the recent decline has led to a more balanced investor positioning in AI stocks, while valuations have decreased significantly across most areas of the sector. Despite concerns about slowing returns on investments, capital expenditure remains robust.
The strength of earnings and expenditure supports the sector, with J.P. Morgan analysts noting that continued strong earnings and growing evidence of companies' ability to generate actual revenue from AI applications may support a renewed investor interest in the sector. J.P. Morgan believes that tech stocks may not return to previous success levels, but fundamentals remain positive, with multiple investment opportunities within the AI ecosystem.
AI stocks experienced significant gains earlier in the year, before declining due to concerns about the magnitude of capital expenditure and the speed of returns. The sector also faced intense pressure in early September, following warnings from top executives about the risks of rapid technological advancements. These warnings impacted stocks linked to AI, causing a sharp decline.
J.P. Morgan maintains a positive outlook on semiconductor stocks, citing strong fundamentals, growth prospects until 2027, and a continued tight balance between supply and demand until at least 2028. Conversely, the bank is more cautious about software stocks, as the impact of AI on long-term sector prospects and increasing competition among companies continues to unfold.
Analysts note that the sharp decline in software company valuations does not make a direct bet on their decline a suitable option. However, they see room for re-entry into a trading strategy that favors semiconductor stocks over software. This approach is driven by the significant gap in performance between the two sectors.
Global stock indices reflect the widening gap between the sectors, with the MSCI global semiconductor and semiconductor equipment index rising by around 48% since the beginning of the year, while the MSCI global software and services index increased by only 1.3%. J.P. Morgan believes that improved earnings strength and reduced macroeconomic volatility may provide a more favorable environment for sector trading in the coming period.
The bank continues to bet on high spending associated with AI and strong demand for chips. With AI-related stocks regaining traction, investors are closely monitoring the sector's prospects, driven by the growth potential of semiconductor stocks and the ongoing evolution of AI applications.
Key points
- J.P. Morgan analysts see opportunities in semiconductor stocks due to strong fundamentals and growth prospects.
- The recent decline in AI stocks has led to a more balanced investor positioning and lower valuations.
- The bank remains cautious about software stocks due to the impact of AI on long-term sector prospects and increasing competition.
