JPMorgan Chase: The valuation correction of the seven major US tech stocks is nearing its end, but it's unlikely they will return to being the sole performers.

JPMorgan Chase: The valuation correction of the seven major US tech stocks is nearing its end, but it's unlikely they will return to being the sole performers.

After months of valuation compression in the US technology sector, JPMorgan Chase believes the most difficult phase may be over, but the era of "technology dominating the market" will not repeat itself.

According to a report released on September 28 by JPMorgan strategist Mislav Matejka , the valuations of large-cap tech stocks, represented by the "Mag-7," have fallen to a 10-year low. The price-to-earnings premium of hyperscale cloud providers relative to the S&P 500 has also compressed to a low of more than one standard deviation, indicating that the valuation correction is largely nearing its end. The report also maintains an overweight position on semiconductors and recommends repositioning a "long semiconductors, short software" pairing trade.

However, JPMorgan Chase explicitly stated that the technology sector is unlikely to return to its previous extreme dominance. The bank believes that the AI capital expenditure cycle will continue, profit momentum remains robust, and monetization paths are gradually becoming clearer. These factors collectively support the technology sector regaining market attention—but the era of technology stocks dominating market returns is over .

Mag-7 and Hyperscale Cloud Vendors: Valuation Compression Nearing its End

The Mag-7 has consistently underperformed the market this year, and its 12-month forward price-to-earnings ratio relative to the S&P 500 has fallen to a low of nearly one standard deviation, its cheapest level in 10 years . JPMorgan Chase pointed out as early as March that this devaluation process was potentially excessive.

The hyperscale cloud vendor index—comprising Amazon, Google, Microsoft, Meta, and Oracle—has underperformed the S&P 500 by 8% year-to-date. As AI capital expenditures surge, these companies' free cash flow is turning negative: according to Bloomberg data, the combined free cash flow of these five companies is projected to decline from approximately $233.4 billion in 2024 to approximately $10.6 billion in 2026, and turn negative in 2027. Meanwhile, debt and equity financing are increasing accordingly.

JPMorgan Chase acknowledges that the shift in business models from asset-light to asset-heavy does provide some justification for valuation compression, but the current relative price-to-earnings ratio is already above one standard deviation, suggesting the compression may have gone too far. The bank believes that the stock performance of hyperscale cloud vendors will be supported by earnings growth—while further valuation compression may erode some earnings, it will not completely offset them.

Another frequently cited concern is monetization. While the LLM Token price has fallen sharply in recent months, JPMorgan Chase points out that the explosive growth in consumption has been enough to offset the price decline, with overall spending actually still rising and monetization cases continuing to accumulate.

Semiconductors: Earnings continue to be revised upwards, and pair trading re-enters the market.

JPMorgan Chase maintains its overweight position on the semiconductor sector and recommends repositioning a "long semiconductors, short software" pairing trade.

During the momentum liquidation phase in June and July this year, the Philadelphia Semiconductor Index (SOX) fell by as much as 28%, while the Korea Composite Stock Price Index (KOSPI) plummeted by 39%. The latter was amplified by concerns about HBM downsizing and algorithmic efficiency improvements reducing memory demand. However, JPMorgan Chase called for a return to a bullish stance on semiconductors at the end of July, citing continued strong earnings.

Data confirms this assessment: since the relative price of semiconductors compared to software peaked in June, 12-month forward earnings per share for semiconductors have been revised upwards continuously, with an increase of 30%; while earnings expectations for the software sector have shown almost no improvement. JPMorgan believes this significant divergence between price and earnings presents a good buying opportunity.

From an industry fundamentals perspective, JPMorgan's semiconductor research team emphasizes that supply and demand equilibrium is unlikely to be achieved before 2028, and pricing is expected to continue rising until 2027. Recent quarterly reviews from several companies also confirm that demand is still accelerating: Broadcom management stated that inference demand is accelerating the adoption of custom XPUs; Applied Materials' guidance significantly exceeded expectations and described exceptionally strong visibility from its largest customer for eight consecutive quarters; Arm Holdings stated that its cloud/AI royalty portfolio is growing at a rate of 200% annually.

Capital expenditure forecasts for hyperscale cloud vendors also support this assessment. JPMorgan Chase predicts that total capital expenditures for hyperscalers will climb from an estimated $950 billion in 2026 to $1.4 trillion in 2027, and reach $3 trillion in 2030, with a compound annual growth rate of approximately 28% from 2027 to 2030.

Within the semiconductor supply chain, JPMorgan Chase specifically highlighted the semiconductor equipment (SPE) sub-sector and listed ASML as a core European stock. Despite market speculation that lower earnings forecasts have resulted in a low PEG ratio for ASML, JPMorgan Chase sees this as a buying opportunity, with its industry analysts believing the company's fundamentals will ultimately prove robust.

Software: Valuation hits record low, but fundamentals are insufficient to support it.

The software sector has consistently underperformed the broader market since the middle of last year, with investors worried that the rise of AI will render its business and revenue models irrelevant. Currently, valuations of the US AI Vulnerable Basket and European AI-risk stocks have fallen to near historic lows.

In late June of this year, Anthropic CEO Dario Amodei's comments about the need to "slow down the pace of AI development" triggered a 12.2% surge in software stocks relative to semiconductors in a single day, marking one of the largest single-day gains in history. JPMorgan Chase, however, is skeptical, believing that the AI race is essentially a "battle for survival, winner-takes-all" scenario, and a significant slowdown is unlikely.

In March of this year, JPMorgan Chase pointed out that given the significant decline in the software sector, there was a short-term trading opportunity for a rebound, and advised against excessive short selling. However, the bank also emphasized that the profitability of the software sector would continue to be questioned, and that the sector might lag behind other parts of the AI ecosystem in the long term.

Cybersecurity is an exception within the software sector. JPMorgan Chase points out that the security threats posed by AI models are becoming increasingly severe, driving a significant rebound in the stock prices of cybersecurity companies in recent months, and the AI security theme is expected to continue.

Overall Market: Oil Prices and Interest Rates Expected to Resume Upward Momentum After Price and Interest Rate Volatility Subsides

JPMorgan Chase believes that once oil prices and interest rate fluctuations stabilize, coupled with the fading of seasonal headwinds in September, the overall stock market is expected to rebound, with strong third-quarter results serving as a key catalyst.

The main disturbances currently facing the market come from two aspects: First, the yield on the 10-year US Treasury note broke through the 5% mark last week for the first time in nearly two decades, driven by multiple factors including rising energy prices, strong PMI sub-indices, weak demand at the 5-year Treasury auction, and hawkish statements from Federal Reserve officials; second, oil prices rose due to escalating tensions between the US and Iran. Despite this, the S&P 500 and Stoxx Europe 600 indices have only fallen 1% to 3% from their highs, indicating a relatively strong ability of the market to absorb volatility.

JPMorgan Chase points out that the improvement in the technology sector has benefited the overall market—technology stocks account for as much as 39% and 44% of the weighting in the US and emerging market indices, respectively—but outperforming technology stocks is not a necessary condition for a market rally. During the momentum liquidation period from June to July this year, both the KOSPI and SOX fell sharply, but the overall stock market remained stable and reached a new high in August, only recently coming under pressure again due to fluctuations in oil prices and interest rates.

In terms of sector allocation, JPMorgan Chase maintains its overweight position on semiconductors and underweight position on software and media, and is optimistic about the indirect opportunities for South Korea and emerging markets to benefit from the improvement in the semiconductor sector.

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