Key facts
- JPMorgan raised its year-end S&P 500 price target to 8,000 from 7,800.
- The bank cited increasing returns on investment from AI capital expenditures.
- Many large AI spenders have seen their outlooks improve in the second quarter.
- Total AI capex is forecast to reach $900 billion this year, up 85% from last year.
- 86% of S&P 500 firms that reported Q2 results beat earnings expectations.
JPMorgan has raised its year-end price target for the S&P 500 index to 8,000, an increase from its previous forecast of 7,800. The upward revision is driven by the bank's view that companies are beginning to see a tangible return on their substantial investments in artificial intelligence (AI) capital expenditures (capex).
A team of strategists at JPMorgan, led by Dubravko Lakos-Bujas, noted that the payoff from AI buildouts is becoming "increasingly visible." This suggests that the significant sums being invested in AI infrastructure are starting to translate into revenue growth and improved profitability, alleviating investor concerns about return on invested capital (ROIC).
Despite some recent volatility in tech stocks, particularly among large AI spenders like Meta, JPMorgan indicated that the outlook for many of these firms has improved in the second quarter. Factors contributing to this positive shift include expanding order backlogs, greater clarity on cash flow, and robust growth in cloud computing businesses. Companies such as Google, Amazon, and Microsoft have reportedly met high investor expectations.
JPMorgan's analysis suggests that AI monetization may accelerate faster than spending, which would support stronger future revenue growth. The bank's strategists forecast total AI capex to reach approximately $900 billion by the end of the current year, an 85% increase from the previous year, with projections of $1.2 trillion by the end of 2027.
Corporate earnings for the S&P 500 have also shown resilience, with 86% of reporting companies exceeding earnings estimates and 76% surpassing revenue expectations for the second quarter. The index is on pace for its highest blended earnings growth rate in five years.
However, JPMorgan also highlighted potential risks to the market outlook. Free cash flow for many hyperscale companies is expected to remain negative through 2027. Additionally, the US economy continues to exhibit a K-shaped recovery, with a growing disparity between higher earners and lower- to middle-income consumers who are still feeling the effects of inflation.