Persistent geopolitical conflicts in the Middle East are unsettling markets, with AI-related stocks experiencing sharp pullbacks and renewed inflation data sparking concerns among some investors that the 2022 nightmare of stagflation and a market crash could repeat. However, JPMorgan argues the current situation is fundamentally different from 2022, with inflation having peaked and receded while corporate earnings fundamentals remain robust, suggesting market rotation rather than a systemic collapse is the more accurate description.

According to a latest report from JPMorgan's global market strategy team dated July 20th, the energy price shock triggered by the Iran conflict is fading—Brent crude has fallen about 25% quarter-on-quarter, and its pass-through effects have begun to lower the overall US CPI. The three-month seasonally adjusted annualized growth rate of the US headline CPI has dropped from 8.2% in May to 2.8% in June, with eurozone inflation also slowing sequentially. The team led by strategist Mislav Matejka explicitly stated that inflation has started to peak, which will sequentially lead to lower bond yields, reduced hawkish pressure from central banks, and even a weaker US dollar, thereby broadening the scope for rotation among market-leading sectors.

Impact on Markets and JPMorgan's Stance

Regarding the market impact, JPMorgan maintains an overall overweight stance on equities, advising investors to use geopolitically-driven dips to increase holdings. The bank believes that despite significant pullbacks in AI and momentum-related stocks, the MSCI World Index remains within just 1-2% of its all-time high, indicating overall market resilience remains intact. Early data from the Q2 earnings season also provides support, with the proportion of S&P 500 constituents beating profit estimates reaching about 97%, far above the long-term average of 76%.

AI Momentum Unwinding Matures, Semiconductors Nearing a Bottom

Over the past few weeks, AI-related stocks have faced intense selling pressure. According to JPMorgan's report, South Korea's KOSPI index has fallen 25% from its recent peak, the Philadelphia Semiconductor Index (SOX) is down 20%, and individual stocks like Samsung Electronics and Micron Technology have seen declines ranging from 20% to 50%. While the relative performance of the "Mag-7" has stabilized, it still lags the broader market year-to-date. An AI exposure basket is down over 20% relative to the market year-to-date.

JPMorgan views this round of correction as driven by both fundamental and technical factors. On the fundamental side, news that Meta might sell computing resources raised questions about the sustainability of hyperscale data center capital expenditures; reports that Apple is considering procuring memory chips from Chinese suppliers heightened concerns about pricing power erosion for South Korean memory makers; and news of Chinese AI labs like Moonshot narrowing the technology gap with the US, along with LLM token price trends, have also weighed on related stocks. Technically, positioning indicators for chip stocks had previously surged to their highest levels since 1999-2000, and the excessive accumulation of momentum factors was a primary driver of this correction.

However, JPMorgan does not believe this signals sustained market weakness.

The bank points out that the SOX's Relative Strength Index (RSI) is rapidly approaching oversold territory, the excess returns from the momentum factor have been largely given back, and technical positioning pressure has eased significantly. Concurrently, a widening gap is emerging between the price performance and earnings performance of European semiconductor stocks—prices have fallen sharply, but earnings expectations remain firm.

JPMorgan's global technology team maintains an optimistic view on the semiconductor sector, citing reasons including: meaningful supply increments are not expected until 2028 at the earliest; tight DRAM/NAND supply-demand conditions are projected to persist through 2028; and the AI data center capital expenditure wave will continue benefiting the entire semiconductor value chain. The bank advises investors to use summer weakness to build positions in the semiconductor sector.

Inflation Has Peaked: The Key Difference from 2022

The core concern about a "2022 replay" lies in whether an energy shock could once again trigger a vicious cycle of runaway inflation and aggressive central bank rate hikes. Through a systematic comparison, JPMorgan clearly states there are fundamental differences between now and 2022.

In 2022, the US headline CPI peaked at 9.1%, core CPI at 6.6%, wage growth was persistently accelerating, eurozone natural gas prices spiked by up to 389%, the Fed hiked aggressively starting from an ultra-low 0.25% rate, and inflation expectations showed clear signs of de-anchoring. Currently, US headline CPI is around 3.5% and on a decelerating path, core CPI is about 2.6%, wage growth is slowing, the eurozone natural gas price spike was only 108%, the Fed's policy rate stands at 3.75%, and strategic reserve deployment has been far greater than in 2022.

The most critical distinction lies in inflation expectations. JPMorgan data shows the US 5-year, 5-year forward inflation rate has remained within a narrow 25-basis-point range, never breaching 2.60%. This contrasts sharply with the de-anchoring seen in 2022 expectations. The bank believes this provides central banks with greater policy flexibility than currently priced by markets—which still anticipate about 90 basis points of Fed tightening. JPMorgan views this expectation as overly aggressive and likely to be gradually revised. The US 2-year Treasury yield has already begun to retreat from recent highs, suggesting the hawkish repricing in June may have marked the high-water mark for this cycle.

Geopolitical Shocks Show a "Diminishing Effect," Advocating Buying on Dips

Since its outbreak in February, the Iran conflict has undergone multiple rounds of escalation and de-escalation.

According to a JPMorgan-compiled timeline, following a joint US-Israel strike on Iran in late February, the MSCI World Index fell 3.7% in one week and 8.6% in one month; the market rebounded quickly after a ceasefire agreement in April; the ceasefire breakdown in early June triggered another 3.8% weekly drop; and after a permanent ceasefire announcement in mid-June, the market decline narrowed to just 0.5%. In early July, when Iran was again accused of attacking ships in the Strait of Hormuz, leading to renewed US sanctions and strikes, the market reaction was notably more muted.

JPMorgan observes that the magnitude of market pullbacks triggered by each successive geopolitical shock is diminishing, with markets increasingly inclined to view geopolitical risks as temporary factors, especially given the strong de-escalation incentives on both sides of the conflict. Since the second half of March, the bank has consistently advised investors to use geopolitically-driven dips to increase equity exposure and maintains this view.

Strong Q2 Earnings, Eurozone Profit Revisions Catch Up to the US

Early earnings season data provides additional market support.

JPMorgan's report shows that among S&P 500 constituents that have reported so far, the proportion beating profit estimates is about 97%, significantly higher than the 76% long-term average; the beat rate for Europe's Stoxx 600 is also well above its historical mean. More importantly, the stock price reaction to beats has been distinctly positive, both in the US and Europe.

Sectors previously highlighted as favorites by JPMorgan, namely semiconductors and banks, have delivered strong results. TSMC's earnings showed continued order momentum and provided positive guidance for 2027 capacity plans; the banking sector exhibited resilient net interest income and robust investment banking revenue.

In the eurozone, the EPS revision ratio has accelerated for 15 consecutive weeks and, for the first time since January 2025, has fully caught up with the US. JPMorgan notes this improvement is broad-based—all seven top-level sector groups show positive revision momentum, led by Energy and IT, with notable acceleration also in Materials, Industrials, and Communication Services, benefiting from fiscal stimulus transmission and global trade recovery. The bank maintains an overweight on the eurozone regionally and believes that, barring a sustained escalation of the Iran conflict in the second half, the eurozone's earnings uptrend could continue.

In overall strategy, JPMorgan maintains its views to overweight equities, overweight cyclical stocks relative to defensives, and overweight the eurozone relative to the US. It views semiconductors as a tactical buying opportunity following the recent pullback, while continuing to avoid sectors like software, commercial services, and media that are vulnerable to AI disruption, as well as energy stocks.