Stock market outlook: JPM bumps S&P 500 price target, eyes AI monetization

Returns on AI capex have been a looming question for Wall Street investors, but JPMorgan says that elusive AI monetization is a big reason it’s boosting its S&P 500 price target for the year.

The bank’s strategists hiked their target for the benchmark index on Monday, as they eye an “increasingly visible” payoff from the huge sums of money being poured into the AI buildout.

In a note to clients, a team led by the bank’s Dubravko Lakos-Bujas raised their year-end forecast for the benchmark index to 8,000, a slight increase from the bank’s prior year-end target of 7,800 and about 3% higher than Monday’s levels.

Strategists cited higher earnings as investors finally begin to see the ROI from the billions spent in AI capex — a key concern that has weighed on hyperscaler stocks all year.

It’s been a rough few months for the tech trade, with investors intermittently punishing large AI spenders as concerns build over valuations and whether all that capex will be worth it. The Roundhill Magnificent Seven ETF, for instance, is down 2% from its peak in May. Meta, one of the biggest spenders of the Mag Seven group, is down 7% year-to-date.

But the outlook for many of these firms has already started to improve during the second quarter, JPMorgan said. Strategists pointed to expanding backlogs, improved cash flow visibility, and stronger growth in cloud businesses, which have allowed firms like Google, Amazon, and Microsoft to clear “a high investor expectation bar,” they wrote in a note.

“This suggests that monetization may start ramping faster than spending, which should support stronger future revenue growth and further alleviate concerns about ROIC,” the bank said.

AI capex is expected to keep rising. The bank said consensus estimates now forecast total capex to reach around $900 billion by the end of the year, up about 85% from last year. The figure could rise to $1.2 trillion by the end of 2027, JPMorgan estimated.

Corporate earnings growth, meanwhile, shows no sign of slowing down. Of the S&P 500 firms that have already reported their results for the second quarter, 86% have beaten on earnings, and 76% have beaten on revenue estimates, according to the latest update from FactSet.

The index is also on track for the highest blended earnings growth rate in five years, the analytics firm said on Friday.

Despite the bullish outlook, strategists pointed to several risks that still hang over the market. Free cash flow at most of the hyperscalers will likely continue to be negative through 2027, JPM said. The US economy also remains K-shaped from a consumer perspective, the bank added, referring to the growing bifurcation between top earnings and lower- to middle-income Americans, who remain pressured by the cumulative impact of inflation.