JP Morgan's "battle plan" for the US stock market in 2026: "Selective" bull market approaching, sector rotations will benefit high-quality growth and low volatility stocks.

JP Morgan recently released the "2026 US Stock Market Outlook" report, focusing on the specific opportunities and risks faced by various sectors in an economic environment being driven by artificial intelligence (AI) and exhibiting K-shaped differentiation. Investor sentiment is constructive overall, but selective. The technology, industrial, and some financial sectors are expected to benefit from long-term transformative trends and capital investments. On the other hand, consumer essentials, residential construction companies, and some energy stocks may face obstacles due to profit margin pressures, regulatory uncertainty, and cyclic demand risks. JP Morgan highlighted several key investment themes for 2026 in the report, including long-term growth driven by AI and data center expansion, a tailwind for infrastructure construction and electrification, and a trend towards high-quality growth and operational resilience. The bank pointed out that investors should focus on companies with strong pricing power, long-term growth drivers, robust balance sheets, and the ability to benefit from data center expansion and infrastructure investments. These companies are typically leaders in innovation, benefit from industry consolidation, and have strong management teams in operational efficiency and capital allocation. They are also likely to capitalize on regulatory or policy tailwinds. Here are the stocks selected by JP Morgan by sector for 2026: Stock Strategy JP Morgan expects the US to continue to be the global growth engine, thanks to its resilient economy and the AI-driven supercycle that is driving record capital spending, rapid profit expansion, and unprecedented market concentration in high-quality growth AI beneficiary stocks. Even as companies and governments compete to invest in AI for productivity gains and out of fear of falling behind, momentum in the industry is notably spreading regionally and across a wide range of industry sectors from technology, utilities, to banks, healthcare, and logistics. However, this growth is unfolding in a K-shaped economy, naturally creating winners and losers. The "wall of worry" for AI (a widely circulated Wall Street adage describing the multiple negative factors that market has to overcome during an uptrend) may persist in the coming years. In such an environment, broad market sentiment indicators may still be prone to sharp fluctuations, as seen earlier this year and recently. Despite concerns of an AI bubble and valuation worries, JP Morgan believes that the current high valuation multiples correctly anticipate above-trend profit growth, the AI capital spending boom, rising shareholder returns, and looser fiscal and monetary policies. Additionally, the earnings benefits related to deregulation and the productivity gains associated with the increasingly widespread use of AI are still underestimated. Even as the K-shaped recovery continues, US disposable income grew by around $1.3 trillion to approximately $26.3 trillion in the past year (a nominal increase of 5.1% and a real increase of 2.3%), while household net worth rose to a record $176 trillion at the end of the second quarter of 2025 (an increase of about $10 trillion in the past year and $58 trillion in the past five years). The crowded trades in high-beta/speculative growth sectors remain a tactical risk, but the bank believes that sector rotation will ultimately benefit high-quality growth low-volatility stocks (which are the main style factor in the S&P 500 Index, with a combined weight of 86%). JP Morgan maintains a constructive view on the outlook for the S&P 500 Index, both in terms of the target price (7,500 points by the end of 2026) and the expected above-trend earnings growth of at least 13%-15% over the next two years (forecasting EPS of $315 for 2026 and $355 for 2027, compared to the market consensus of $309 and $352, respectively). This outlook is based on the views of JP Morgan's economic department, which anticipates two more rate cuts by the Federal Reserve, followed by a longer pause. However, if the Federal Reserve further cuts rates due to improving inflation dynamics, the bank believes there is more upside potential, and the S&P 500 Index could break through 8,000 points in 2026. 1. The US will continue to be the global growth engine around the AI supercycle Although the AI theme is largely centered in the US, some global participants including China, South Korea, Japan, and a few Eurozone companies are increasingly becoming integral parts of the supply chain and well-positioned to benefit from AI expansion. 2. 2026 should be another strong year for AI stocks, with capital spending possibly exceeding expectations The "fear of being left behind" (FOBO) is driving accelerated spending by businesses and governments, making next year another significant phase of building infrastructure and computational resources to address supply-demand imbalances. While concerns about a bubble persist, the fundamentals of the industry remain strong, with robust profitability, healthy cash flows, and strong balance sheets. While recent financing curves appear manageable, a long-term capital expenditure boom may require seeking alternative sources of funding. As companies across various industries deploy AI to unlock new revenue streams or achieve significant cost savings, commercialization will garner more attention. It is noteworthy that labor-intensive industries (such as large banks and pharmaceutical companies) have yet to reflect the cost-saving benefits driven by AI in widespread profit forecasts, as only a few companies have mentioned these benefits. Analysis of earnings call records shows that about 60% of S&P 500 companies are investing in AI, with 50% mentioning cost savings and efficiency improvements. By later next year, it is expected that more companies will provide specific cases. 3. AI will further drive the K-shaped economy with increasing polarization - with market concentration and narrowing leadership ranges reaching new highs, a situation of "winner takes all" will continue As the AI narrative counteracts concerns about macro weakness, profit deceleration, or policy changes, the decoupling of the S&P 500 Index from the "old economy" is intensifying. JP Morgan's AI 30 stocks currently account for 44% of the market capitalization of the S&P 500 Index ("Big Seven" US stocks + Broadcom account for 39%), higher than the 26% recorded in November 2022 when ChatGPT was introduced ("Big Seven" US stocks + Broadcom accounted for 23%). This level of concentration now surpasses the historical peak of the "Nifty Fifty" era. Unlike that period, today's concentration is mainly focused on high-quality growth stocks. These stocks have strong profit margins, resilience in cash flow growth even in the face of shocks, strict capital return discipline, and relatively low credit risk, positioning them uniquely favorably to deploy capital on a large scale in the face of new opportunities like AI. 4. The US business cycle (JP Morgan QMI indicator) is currently in a slowdown phase after three years of expansion, but this does not signal contraction of the cycle ending. Recent softness is mainly due to the anticipated impact of the US federal government shutdown on GDP, but there are significant offsets to this in early next year - pent-up demand post government shutdown, tax refunds related to the "Build Back Better Act" (OBBBA), increased AI capital spending, and the effects of the 150 basis points of rate cuts since September 2024 still transmitting into the economy. Most real growth indicators are still in the expansion phase, and the balance sheets of consumers and businesses are relatively healthy. Additionally, the weakness in the labor market should be sufficient to prompt the Federal Reserve to cut rates by 25 basis points each in January and May 2026, with the possibility of a rate cut in December next year diminishing. Contrastingly, liquidity and inflation in the QMI indicators face risks of mean reversion, and market sentiment remains a major indicator of cyclical fluctuations. It should be noted that tightening liquidity would require the Federal Reserve to maintain a higher level of vigilance next year. 5. Driven by the long-term tailwinds of AI, earnings growth over the next two years is expected to accelerate to above-trend levels of 13%-15%. This is relative to the long-term average earnings growth rate of 8%-9%, implying a forward price-to-earnings ratio of around 25x. For the next year, JP Morgan forecasts revenue growth of 7% for the S&P 500 Index (excluding AI portion, it is 5%), with a 35 basis points expansion in profit margins pushing the 2026 EPS to $315 for the S&P 500 Index (a 15% year-over-year growth). The question of whether capital expenditure cycles can expand beyond the AI sector is highly sensitive to monetary policy, but with some policy uncertainties being resolved, a catch-up may be expected next year. Moreover, after shareholder returns are forecasted to grow by about 8% to approximately $1.8 trillion this year (with $1.1 trillion from stock buybacks), JP Morgan anticipates a slight slowdown to around $1.7 trillion in 2026. JP Morgan remains overweight on the Telecom, Media, and Technology (TMT), Utilities, and Defense sectors, and while maintaining a neutral view on the overall Financials and Healthcare sectors, sees further potential in the Banking and Pharmaceuticals sectors. The bank continues to favor the high-quality growth momentum factor and maintains a tactical positive view on the low-volatility factor. 6. Beyond AI, a dynamic policy environment will drive differentiation among stock themes, though the magnitude may be lower than in 2025. Ongoing US-China competition and US supply chain diversification, as well as support for AI/electrification, should benefit global strategic resources like rare earths and uranium through private and government investments. Deregulation is expected to gain momentum, especially for the financial, housing supply chain, and some energy sectors, as regulatory rollbacks help reduce deficits. Tactical opportunities are emerging for low-end consumer stocks and US importers, whose valuations are attractive, with short-term upside potential provided by fiscal stimulus related to the "Build Back Better Act" and possible tariff reductions (until the first quarter of 2026), despite long-term challenges. Maintaining selectivity on trade and tariff issues is crucial, with US tariff-affected companies being relatively favored compared to global peers.