JPMorgan said in its latest report on Aug. 4 that it still favors a “technology plus cyclicals” equity allocation and is recommending healthcare as a third investment theme to reduce a portfolio’s overall correlation with macro factors.
Tech seen as a rebound trade
The bank said the technology sector now presents an oversold rebound opportunity. According to the report, the forward price-to-earnings ratio of the U.S. “Magnificent Seven,” excluding semiconductor companies, has dropped to two standard deviations below its average since 2018. A return to that historical mean could imply about 56% upside.
JPMorgan also said the market has become overly concerned about returns on AI investment. The report stated that backlog growth at hyperscale cloud companies is running at about 150%, ahead of capital expenditure growth of roughly 80%. On that basis, the bank said it sees a mean reversion opportunity in AI-related assets and highlighted AI names in Asia-Pacific markets, especially South Korea.
Cyclicals: rotate into industrials
Within cyclicals, JPMorgan recommended rotating out of financials and consumer stocks and into industrial shares. The bank said industrial companies are positioned to benefit from improving global economic conditions, a recovery in earnings, and valuation re-rating tied to the AI theme.
Healthcare added as a defensive allocation
Beyond technology and cyclicals, the report recommended healthcare as a defensive allocation. JPMorgan said the sector has lower correlation with the macro cycle and can help reduce portfolio volatility.
Hong Kong stocks and Asian refiners on the watchlist
In emerging markets, JPMorgan said it is tactically bullish on Hong Kong-listed Chinese stocks, arguing that Hong Kong equities could benefit from AI infrastructure buildout and commercialization trends. The report added, though, that Hong Kong stocks have lagged gains seen in South Korea, Taiwan and A-shares.
At the same time, the bank advised investors to take partial profits in some AI supply chain names that have risen too far and become crowded trades. It also recommended watching Asian refining companies, saying geopolitical uncertainty is pushing Asian refining margins to historical highs.