J.P. Morgan's 2025 US stock strategy: AI is still the core engine, and we need to be wary of inflation and valuation risks in the short term

The Zhitong Finance App learned that on September 10, 2025, J.P. Morgan Chase released the “Global Stock Strategy Update Report”, focusing on current market “Wall of Worry” (Wall of Worry) and AI sector trends. The report points out that although factors such as tariffs and immigration form resistance to growth, US stock companies have achieved healthy profit growth with the rapid penetration of AI, strong capital expenditure, and resilient consumption; however, they need to be wary of a rebound in inflation and the risk of overvaluation in the short term, while in the medium to long term, they are optimistic about market potential under AI and policy dividends.

1. US stocks: Strong earnings but under pressure in the short term. Be wary of August CPI data

1. Four major driving forces supporting US stocks

Komo believes that the core support for the current profit growth of US stock companies comes from four aspects:

Accelerated implementation of AI: AI technology penetration drives efficiency improvement and becomes a key engine for profit growth;

Strong capital expenditure (Capex): companies are willing to invest, laying the foundation for long-term growth;

Consumer Resilience: As of August 29, US consumer spending increased 4.1% year over year (+ 3.6%), with optional spending (+5.3%) and Gen Z/Millennial consumption (+7.0%) being the main drivers (insert image: Chase consumption data);

Weakening of the US dollar: It favors exporting companies and indirectly boosts profits.

Furthermore, the implementation of the initial expenditure of the “OBBBA” (OBBBA) is also partially offsetting growth resistance brought about by tariffs and immigration.

2. Three short-term risks to be wary of

Despite strong fundamentals, after the S&P 500 experienced its best performance in almost 20 years during the non-recession period, short-term risks have emerged:

High positions and high valuations: Investors' positions are high, market valuations are expensive, and speculation on high-beta stocks is intensifying;

Inflationary rebound pressure: Inflation caused by tariffs is beginning to rise, which may limit the Fed's interest rate cut path (currently the market expects to cut interest rates 6 times before the end of 2026). The upcoming August CPI data is a key risk point;

Seasonal weakness: September-October was a period of weak performance in US stocks in history (see chart below).

J.P. Morgan suggests that investors can hedge CPI risk through options tools — the implied fluctuation between the current CPI and the Federal Reserve Meeting (FOMC) is lower than historical levels, and they can buy 99%-98% put options due on September 19 (cost only 0.174%), covering two major risk events, with potential profit leverage of nearly 6 times (S&P 500 reference point 6498).

2. AI sector: accounting for 43% of the S&P 500 market value, becoming the absolute core driving force

1. AI stocks dominate US stock performance and profits

Approximately 30 AI-related stocks in the S&P 500 together account for 43% of the market capitalization of the index, and have contributed almost all of the S&P 500's earnings and most profit growth since the launch of ChatGPT in November 2022 (see chart below).

2. Investments at the level of 100 billion have been increased, and future growth can be expected

Over the past year, these AI companies have collectively invested about $800 billion in capital expenditure and research and development (R&D) (both account for 50%), and investment spending is expected to increase 33% over the next 12 months.

J.P. Morgan's “AI/ Data Center/ Electrification” basket (JPAMAIDE Index) has always led the market — the index peaked, bottomed out, and reached new highs before the S&P 500, and successfully held the 50-day MA (50-Day MAVG) last week; the report suggests that if the index falls below the 50-day EMA, it may trigger a wider market correction.

3. Consumption and Buybacks: The “Double Pillars” of US Stocks

1. Consumer: Low Debt + Interest Rate Cut Catalytic Expenses

American consumers are currently in the best financial position in nearly 60 years: the debt-to-asset ratio (debt-to-asset) has fallen to its lowest level since the 1960s (see chart below), and the rise in wealth and asset prices since 2020 is the core reason. If this ratio returns to the historical average, approximately $2 trillion in incremental credit could be released, further supporting consumption and asset purchases.

The report predicts that future interest rate cuts will be a catalyst for consumption. In particular, if the housing turnover rate increases in the next few quarters, consumption growth is expected to accelerate.

2. Buybacks and shareholder returns: absorbing supply on a record scale

The size of the S&P 500 share repurchase announcement has reached 95.8 billion US dollars from the beginning of the year, far exceeding the average value of 644 billion US dollars in the same period of the previous three years (equivalent to about 5 billion US dollars of repurchases per trading day); when combined with dividends of 700 billion US dollars, the total shareholder return scale (1.2 to 1.3 trillion US dollars in repurchases + 700 billion US dollars in dividends) has exceeded the total stock market value of most countries such as Australia, South Korea, and Italy.

Large-scale repurchases and dividends have effectively absorbed the stock supply in the market and have become an important force supporting the valuation of US stocks.

4. Inflation and Policy: Underpinned by the OBBBA Act, CPI becomes the key in the short term

1. Inflation risk: Tariffs drive up durable goods inflation, August CPI may become a “black swan”

J.P. Morgan's PM Inflation Index (QI) shows that there is an upward trend in US inflation (see chart below), and the impact of tariffs on durable goods inflation has begun to show. If the August CPI data is higher than expected, the current “Goldilocks” (Goldilocks) market pattern (soft data favors interest rate cut expectations) may face adjustments, with high-risk assets with high leverage, low volatility, and high congestion bearing the brunt.

Judging from historical data, the performance of US stocks during the period of rising inflation was significantly weaker than the down/stabilization period: during the period of upward inflation from 1966-1980, the S&P 500 rose only 2% per year after adjusting for inflation; while in the 1981-1995 period of downward inflation, the average annual increase of the index reached 12%.

2. Policy dividend: OBBBA bill supports growth in upfront expenditure

The implementation of the initial expenditure of the “OBBBA” (OBBBA) has become the key to offsetting growth resistance. The report predicts that in 2025-2026, the bill will bring in $373 billion in additional deficit spending (current policy caliber), focusing on AI, data centers, electrification and defense, providing direct benefits to related sectors.

5. Investment Strategy: Short-term defense, medium- to long-term focus on AI and high-quality growth

1. Short-term: avoid high beta and focus on stocks benefiting from low volatility and inflation

If inflation rebounds beyond expectations, J.P. Morgan suggests adjusting the position structure:

Style level: Prioritize low volatility (Low Vol) stocks over high beta (High Beta) stocks; prefer Quality Growth stocks (Quality Growth) over Quality Defensive Stocks (Quality Defensive Stocks);

Sector level: Focus on sectors benefiting from inflation (such as banking, insurance, energy) and avoid interest rate sensitive sectors (such as essential consumption, telecommunications, real estate);

Tool level: The J.P. Morgan Chase “Inflation Outperforms Basket” (JPAMINOP Index) can be configured. The basket focuses on cyclical stocks that are highly correlated with inflation and commodities. Historically, they have performed better than the market during periods of rising inflation.

2. Medium to long term: AI is still the core, S&P 500 points to 7,000 points

J.P. Morgan predicts that the S&P 500 is expected to rise to 7,000 points in early 2026. The core logic includes:

AI continues to drive profits: The profit growth rate of the AI sector far exceeds that of the non-AI sector, and capital expenditure continues to increase;

Policy and liquidity support: Early expenditure of the OBBBA Act has been implemented, and future interest rate cuts will boost consumption and risk assets;

Highly structured valuation: The S&P 500 will maintain a valuation of more than 20 times (23 times the current PE) due to continued profits, AI premiums, and high-quality global asset attributes.

3. Risk Alerts

Rising long-term interest rates: Long-term interest rates in developed markets such as France, Japan, and the United Kingdom are rising in a disorderly manner, or dragging down global risk asset valuations;

High beta stock correction: If expectations of interest rate cuts cool down, small and medium capitalization stocks (SMID) and unprofitable companies (including speculative AI stocks) may face greater pullback pressure;

AI sector fluctuations: If AI stocks fall below key technical levels (such as the 50-day EMA), it may trigger a chain reaction in the market.

Conclusions

J.P. Morgan believes that the current market is in a “short-term prudent, medium- to long-term optimistic” pattern: the August CPI and September-October seasonality are weak or cause short-term fluctuations, but AI engines, consumer resilience, and policy dividends will support the medium- to long-term upward trend in US stocks. Investors need to find a balance between defense and offense, keep an eye on AI sector trends and inflation data, and seize opportunities for stocks that benefit from low volatility, high-quality growth and inflation.