International stocks, AI beneficiaries are set to outperform in a complicated second half, JPMorgan Asset Management says

JPMorgan Asset Management identifies international equities and a diversified set of AI beneficiaries as key areas for investor returns in the second half of the year. International developed and emerging markets have significantly outperformed the S&P 500 year-to-date, rallying over 17% against the S&P's 7%, a trend JPM AM expects to persist due to US dollar depreciation and a normalization of global equity performance after a decade of US exceptionalism. While the AI theme remains robust, they recommend shifting focus beyond the 'Magnificent Seven' to utilities, industrials, and broader AI adopters, citing the former's decelerating earnings growth and stretched US valuations.

Analysis

JPMorgan Asset Management has identified two primary areas for potential returns in the second half of the year: international equities and a broader set of artificial intelligence beneficiaries. The firm highlights that international developed markets (IDEV) and emerging markets (EEM) have both rallied over 17% year-to-date, significantly outpacing the S&P 500's approximate 7% gain. This outperformance is expected to persist, driven by a projected depreciation of the U.S. dollar, a 'normalization' of global returns following a decade of U.S. market dominance, and the potential for laggard markets like Japan and India to accelerate. This view contrasts stretched and highly concentrated U.S. equity valuations with international markets recovering from a lower base. Concurrently, while the AI theme remains a powerful market driver, JPM AM advises a strategic pivot away from the 'Magnificent Seven'. This caution is supported by data indicating a sharp deceleration in the group's earnings growth, which is projected to fall to 14% in the second quarter from over 27% in the first. Investors are instead directed towards the next phase of the AI theme, which includes expansion into utilities, industrials, semiconductor firms, and other companies adopting AI for productivity gains.

Key Decisions for Investors

• Investors should consider increasing allocation to international equities, such as developed ex-US (IDEV) and emerging market (EEM) funds, to capitalize on the expected continued outperformance and potential US dollar depreciation.
• It may be prudent to re-evaluate heavy concentrations in 'Magnificent Seven' stocks, as their earnings growth is forecast to decelerate significantly to 14% in Q2 from 27% in Q1.
• Focus research on identifying investment opportunities in the next phase of AI beneficiaries beyond large-cap tech, specifically within sectors like utilities, industrials, and semiconductors that are integral to the theme's broader adoption.
• Closely monitor the trajectory of the US dollar and relative valuation spreads between US and international markets, as these are the primary catalysts cited for the recommended strategic shift.