JPMorgan, one of the largest US banks, told clients on Monday that the recent pullback in artificial intelligence-related stocks has reset the trade, potentially making semiconductor shares attractive again. In a note led by strategist Mislav Matejka, the bank argued that the selloff has "cleaned up" investor positioning and brought valuations down to more reasonable levels, even as the long-term AI story remains intact.
What happened?
The AI trade, which had been one of the market's biggest drivers over the past year, saw a sharp correction in recent weeks. Investors who had piled into AI winners—particularly chipmakers and other hardware names—began to trim their positions, worried about stretched valuations and the pace at which companies are seeing returns on their massive AI spending.
JPMorgan's note suggests that this pullback may have been healthy. With crowded trades unwound and prices lower, the risk-reward for semiconductors has improved. The bank's strategists see the fundamental story—big tech companies continuing to invest in data centers and advanced chips—as still intact, even if the market is now more skeptical about how quickly those investments will pay off.
Why semiconductors look better
The key argument from JPMorgan is about mechanics rather than hype. When too many investors hold the same trade, any bad news can trigger a rapid selloff. That appears to have happened with AI stocks. Now that positioning is cleaner, the downside risk is reduced, and the upside potential from here is more attractive.
Valuations also matter. After the pullback, semiconductor stocks are trading at lower price-to-earnings multiples than they were a few months ago. For investors who missed the initial run-up, this could be an entry point. The bank notes that while "Tech may not return to past levels of success," the sector still offers opportunities, particularly in chips.
Software remains a tougher call
Not all of tech is getting the same treatment. JPMorgan is more cautious on software stocks, which face a different set of challenges. Software companies often rely on recurring subscription revenue, but they also carry higher valuations and are more sensitive to interest rates. In a higher-for-longer rate environment, the present value of future earnings is discounted more heavily, which can weigh on software multiples.
Moreover, the debate over AI's return on investment is more acute in software, where it can take longer to see tangible results. While chipmakers benefit from immediate demand for hardware, software firms must prove that AI features translate into higher revenue—a process that is still in its early stages.
What it means for investors
For everyday investors, this note is a reminder that market pullbacks can create opportunities, but they also require careful judgment. The AI trade is not over, according to JPMorgan, but it has matured. The days of indiscriminate buying may be behind us, and selectivity will be key.
If you hold semiconductor stocks or funds, the bank's view suggests that the recent decline might be a temporary setback rather than the end of the trend. However, it's important to remember that no one can predict the bottom, and valuations can always get cheaper.
For those considering new positions, the takeaway is to focus on companies with strong fundamentals and reasonable valuations, rather than chasing momentum. Diversification remains a cornerstone of prudent investing, and tech—while exciting—should be balanced with other sectors.
Broader market context
The AI pullback comes amid a mixed backdrop for global markets. Trade tensions between the US and China have eased somewhat, with the recent trade truce extension providing some relief. However, Chinese stocks slipped despite the news, highlighting lingering uncertainties.
In the US, investors are watching economic data closely. The dollar slipped as traders awaited key reports, and there are ongoing questions about the Federal Reserve's next moves. JPMorgan's own economists have predicted rate cuts in Turkey, but for the US, the path is less clear.
For tech investors, the key will be watching earnings reports from major chipmakers and software firms in the coming weeks. If companies continue to guide for strong AI-related spending, that could support the semiconductor rebound. Conversely, any signs of softening demand could reignite concerns.
Ultimately, JPMorgan's note is a nuanced take: the AI story is far from over, but the easy money has been made. The next phase will reward patience and discernment, not just enthusiasm.
