J.P. Morgan Wealth Management released its 2026 Mid-Year Outlook on June 1, laying out how it is framing the second half of the year for high-net-worth clients. The report arrives against a tense macro backdrop: the closure of the Strait of Hormuz has pushed oil prices sharply higher, inflation has reaccelerated, and the once euphoric AI narrative has shifted into a more skeptical phase. Even so, the overall tone of the report is cautiously constructive. J.P. Morgan argues that markets have become overly pessimistic in pricing three global risks: fragmentation, inflation and the disruptive force of artificial intelligence.
The firm’s broad allocation message is direct: stay invested in the AI supercycle and U.S. equities, use real assets and alternative strategies to hedge inflation, reduce cash and short-duration bond holdings, and look more closely at emerging markets. At the same time, the report emphasizes that the AI trade is no longer a uniform story. The largest cloud and computing companies continue to spend aggressively, while traditional subscription software businesses are already facing pressure from AI-driven changes in enterprise demand.
AI capital spending is still rising
J.P. Morgan opens its AI discussion by saying that Wall Street has become too bearish on the AI supercycle. The central evidence comes from five major hyperscalers: Microsoft, Meta, Oracle, Google and Amazon. Their combined 2026 capital expenditure expectations now exceed $650 billion, up another $130 billion from the prior earnings season. AI-related investment contributed 25 basis points to real U.S. GDP growth in 2025. Taiwan’s GDP growth exceeded 7%, the fastest pace since 2010, with semiconductor exports serving as the key driver.
Demand for computing capacity remains tight. Cloud rental prices for GPUs, the core chips used to train AI models, have risen 40% since last October, while supply continues to lag demand. Nvidia trades at a 40% discount to its average price-to-earnings multiple over the past decade, which J.P. Morgan says reflects a market that is pricing in a peak in chip sales. Yet cloud revenue is still accelerating. On that basis, the report argues that the available data does not support the idea that the AI cycle has already topped.
The report does not ignore the changing financial profile of the hyperscalers. Free cash flow across the group is expected to fall from $240 billion in 2024 to $73 billion by the end of 2026. Microsoft’s forward P/E has dropped from an AI-era high of 35 times to 22.5 times. The asset-light, high-return model that attracted investors over the past decade is being rewritten by heavy capital investment. J.P. Morgan says investors should focus more on revenue growth than near-term cash flow at this stage, while acknowledging that if demand slows, today’s massive investment commitments could become a drag.
Subscription software is on the front line of AI disruption
Not every part of the AI ecosystem is benefiting. J.P. Morgan identifies traditional software companies as among the first real casualties. Roughly half of the constituents in the S&P software index have fallen more than 50% from their historical highs. The firm’s basket of AI-vulnerable stocks is down nearly 20% this year, and the median operating margin in the software sector is only 4%. The pressure comes from a simple business-model issue: SaaS companies charge by seat, while AI reduces the number of seats that companies need.
This pressure has already reached credit markets. Around 21% of the U.S. direct lending market’s exposure is to software companies. When technology and business services are included, that figure rises to 40%. Publicly traded technology loan funds have fallen close to their prior-cycle lows. J.P. Morgan’s stress test shows that leveraged losses could reach 4% in an extreme scenario, though the report does not describe this as a systemic risk at present.
The report also flags the expected cluster of large private technology listings. SpaceX, Anthropic and OpenAI are named as companies that could list in the same year. J.P. Morgan reviews historical data around the 25 largest IPOs and finds that, after those deals, the median new issue underperformed the broader market by 30 percentage points in its first year. Among 18 such stocks, 12 fell during their first year. In years with mega-IPOs, the broader market’s median annual return was only 3%, well below the long-term average of 10%. The report does not say that this proves the AI cycle has peaked, but it treats the market reaction to a SpaceX listing as a useful cycle thermometer.
Inflation has a higher floor, and cash is losing purchasing power
The inflation section is not focused only on the oil shock caused by the Strait of Hormuz. Its main point is that U.S. inflation had already failed to return to its pre-pandemic norm before energy prices surged. In January 2026, core PCE inflation was 3.1% year over year, with local services categories such as restaurants and personal care showing firm price increases. Oil prices then doubled. The Federal Reserve’s model indicates that every $10 increase in oil prices lifts inflation by roughly 0.3 percentage points; this time, the increase was $40.
J.P. Morgan does not frame the situation as a full replay of the 1970s. The labor market has not shown a wage-price spiral, quit rates are falling, housing inflation has declined from 5% at the end of 2024 to just above 3%, and China’s excess capacity is helping suppress global goods prices. Still, the firm’s conclusion is that the inflation floor is meaningfully higher than it was before the pandemic and is likely to hover around 3%.
The purchasing-power math is central to the report. Since 2020, U.S. consumer prices have risen by a cumulative 25%, while core fixed income has returned only 6%. Cash returns have been even lower. Nearly 20% of J.P. Morgan client assets remain in cash and short-term bonds. The firm’s message is that investors who believe they are simply avoiding risk may in fact be accepting a steady loss of real value.
J.P. Morgan’s proposed response is to increase allocations to real assets. Commodities, infrastructure and real estate—assets linked more closely to inflation—are suggested at a combined allocation of about 5% of a portfolio. Gold is recommended separately at 3% to 6%. Alternative strategies are also included in the framework. In 2022, when both stocks and bonds fell, macro hedge fund strategies returned 9%. The firm also notes a major adoption gap among its own private banking clients: 94% have never bought hedge funds, and 86% have never bought infrastructure products.
Geopolitical fragmentation reshapes equity and emerging-market opportunities
J.P. Morgan describes the closure of the Strait of Hormuz as the biggest market shock of the first half of the year. Around 20 million barrels of oil pass through the route each day, equal to one-fifth of global oil consumption. After the joint U.S.-Israeli strike on Iran, oil prices nearly doubled within days, and European natural gas prices rose close to 100% over two days. Qatar Energy’s chief executive said that 15% of LNG capacity could remain offline for as long as five years. Qatar also supplies about 30% of the world’s helium, a material required in chipmaking, and South Korea has warned about the risk of chip plant shutdowns.
The report says the conflict is moving toward de-escalation, but damage to physical infrastructure and the energy risk premium will not disappear quickly. J.P. Morgan’s allocation advice in this context is to add to U.S. equities during the pullback. U.S. stocks fell about 10% in the first half, and the S&P 500’s P/E briefly dropped below 20 times. Historical data cited by the firm shows that when the VIX rises above 30, buying equities has produced positive six-month returns 70% to 83% of the time, with an average gain of 12.4%.
The report also argues that the U.S. and China are building separate ecosystems. The United States is restricting chip exports to China and working with the Netherlands and Japan to limit access to semiconductor equipment. China is expanding exports to non-U.S. markets. Belt and Road investment reached a record high in 2025; China invested $53 billion in Brazil over one year, and its trade with Latin America has already surpassed that of the United States. J.P. Morgan’s view is that future investment returns will increasingly depend on which bloc an asset belongs to, not only on the company’s own growth.
Fragmentation also creates opportunities in emerging markets. Latin America holds more than 40% of global copper reserves and nearly 60% of lithium reserves, along with nickel, rare earths and agricultural resources. Foreign direct investment has doubled over the past two decades, central banks have shown stronger inflation-control capacity than developed-market peers, and politics are moving toward more pragmatic, pro-business governments. In the Gulf, oil revenues are being used to build AI data centers. Saudi Arabia has partnered with Blackstone on a $3 billion data center project, with costs 30% lower than in the United States.
East Asia remains central to the AI hardware supply chain. Taiwan and South Korea control key nodes, and if AI capital spending continues to accelerate, the report says their exports and pricing power will continue to strengthen. Emerging-market corporate earnings are expected to grow 46%, while the P/E ratio is only 11.8 times. Chinese equities trade at their deepest discount to the rest of Asia in 20 years. The report also notes that 80% of Chinese consumers are excited about AI products, compared with 38% in the United States, and that China’s electricity costs are about half of U.S. levels. J.P. Morgan’s stance toward China is described as cautiously warming; if policy sends clearer pro-business signals, the report says Chinese equities could undergo a structural revaluation.
Europe is the market where J.P. Morgan is most conservative. Electricity prices are two to four times those in the United States. Research and development spending is 2.2% of GDP, compared with 3.6% in the United States and 5.2% in South Korea. Venture capital scale is one-tenth that of the United States. The energy shock is also forcing the European Central Bank back toward rate increases. Within Europe, J.P. Morgan recommends only defense and infrastructure-related exposures, while avoiding autos and consumer names.
Condensed into a single investment framework, the 60-page report favors AI infrastructure—chips, optical modules and power—along with emerging-market stocks and bonds, real assets such as commodities, infrastructure and gold, defense-related assets, and China AI concepts with cautious additions. It is less favorable on cash, traditional subscription software companies, European autos and consumer sectors, and a simple 60/40 stock-bond model as the main tool for navigating the second half of the year. The original TechFlow article notes that the views and recommendations cited are J.P. Morgan’s and do not constitute investment advice. It also reminds readers that sell-side research has a natural bullish bias and that J.P. Morgan provides investment banking services to several companies mentioned in the report. The value of the report lies in its framework and data rather than any single conclusion.