JPMorgan Says the Global Economy Is Entering a New Investment Cycle, Flags Fed Hike Risk and AI Chip Shortage

JPMorgan said the global economy is positioning for the next investment cycle, framing Fed policy, sticky inflation, the dollar, commodities and AI infrastructure spending as the main forces to watch. In an early-September global market outlook, the bank said it expects the Federal Reserve to raise rates by 25 basis points in December, taking the fed funds target range to 3.75% to 4.00%. JPMorgan said inflation is eroding the Fed’s credibility and pushing policymakers toward action. The bank forecast 2026 U.S. GDP growth of 2.0%, core PCE inflation at 3.5% and unemployment at 4.1%. It said the gap between market pricing and the Fed’s own policy path is widening, and that the mismatch could be a key source of volatility over the next few quarters. JPMorgan also expects the 2-year Treasury yield to reach 4.30% by the end of 2026 and the 10-year yield to hit 4.85%, which would widen the 2s10s spread to 55 basis points. The firm said that would extend the steepening trend in the curve. For currencies, JPMorgan said the dollar index is at a key point. It noted that history suggests the trade-weighted dollar often gains about 5% from roughly six months before an initial hike to about one month after it. The bank said the market is still carrying a healthy but not extreme dollar long position. If the Fed does deliver a December hike, JPMorgan thinks the dollar could break out of its current trading range. It projected EUR/USD at 1.08, USD/JPY at 148 and GBP/USD at 1.28 by the end of 2026. On commodities, the bank said oil has absorbed one of the largest supply shocks in history, yet the price reaction has been only average. Its commodities team said inventory draws have been much smaller than expected while demand losses have been much larger than expected, creating what it described as an almost perfect offset. JPMorgan said non-OPEC supply growth reached 2.44 million barrels a day, the strongest pace in a decade, with the U.S., Brazil, Canada and Guyana all responding faster and on a larger scale than expected. It also said China cut crude imports sharply and adjusted refinery operations more than markets had anticipated. Copper is in a wait-and-see phase. JPMorgan said its China copper demand consumer-weighted end-demand indicator turned negative in May at -5% year over year. Construction remains weak, renewable installations are facing a very high comparison base before June 2025, and grid investment faced a similar base effect in May even though year-to-date spending is still up 13% year over year. The bank expects those base effects to fade from June, which should improve the demand readout. The report said AI compute shortages may last longer than the market expects. It pointed to persistently firm rents for older GPUs as evidence that supply remains tight. Hyperscalers are likely to keep spending, while sovereign AI projects and emerging AI data centers are only beginning to add new orders. JPMorgan described AI capital expenditure as a multi-year supercycle. If AI is an existential technology, the firm said, semiconductor spending still has a long runway. It added that power is becoming the core input to AI infrastructure and called electricity “the new necessity.” In that framework, global grid capex should accelerate, long-cycle transmission demand in Europe should rise meaningfully between 2023 and 2030, and order backlogs at Korean power equipment companies should keep building. The bank also said higher nuclear power share in Asia’s generation mix is a trend worth watching. Regionally, JPMorgan said profit growth is splitting into two tracks. Earnings revision breadth is narrowing, the synchronized upcycle is breaking down, and forward EPS growth is diverging sharply across sectors. The gap between AI-linked industries and non-AI industries is widening. The bank pointed to several longer-term themes: Chinese domestic manufacturers are gaining share in the industrial robot market; global military spending is rising as a share of GDP, with South Korea and India showing strong defense export growth; and Asian equity markets with lower foreign participation may prove more resilient during outflows. It also said active retail trading in China’s onshore market remains elevated, making it a distinct source of liquidity in global equities. JPMorgan’s bottom line was that the global economy is laying the groundwork for the next investment cycle. The base is in place, but sticky inflation and policy uncertainty mean the path will not be smooth. AI compute shortages, power infrastructure investment and regional localization are the through-lines of the cycle.