AI investments are starting to pay off – JPMorgan’s Stephen Parker

There are concrete signs that AI investments are beginning to pay off, with companies that have leaned into the technology seeing profit margins widen at an even faster pace than the broader S&P 500 (SP500), according to Stephen Parker, JPMorgan Private Bank co-head of global investment strategy.

In an interview with CNBC, Parker noted that the stock market (SP500), (COMP:IND), (DJI) is experiencing a healthy broadening beyond the “Magnificent Seven” (MAGS) hyperscalers, with the market remaining near all-time highs despite pullbacks in semiconductors (SMH), (SOXX), (SOXL), (FTXL), (XSD), and disruption in the software space (IGV), (XSW), (IGPT).

"The conversation that we were having back in December was this is all about the Mag 7 (MAGS) and the hyperscalers," Parker said. "And then, look what's happened this year. The Mag 7 is down, and the market continues to move higher."

He pointed to strength across industrials (XLI), utilities (XLU), and financials (XLF) as evidence of this broader market participation.

Early earnings results have been strong, with nearly 90% of companies beating expectations, though Parker cautioned that companies missing estimates could face significant downside given elevated market expectations.

Parker identified two primary risks that concern his team: a meaningful pullback in AI capital expenditure spending and a repeat of 2022, where rampant inflation forces the Federal Reserve to tighten more aggressively than markets expect.

The ongoing build-out of data centers remains critical to the market's broadening, though he noted JPMorgan does not currently see a pullback in that spending materializing.

JPMorgan tracks a basket of stocks across different sectors—including technology (XLK), financials (XLF), and industrials (XLI)—that have heavily invested in AI.

"The profit margins in those companies are widening at an even faster pace," Parker said. "So, we are actually seeing signs that AI investment is beginning to pay off. That's what these companies are going to need to see to be able to continue to build at this current pace and for investors to continue to fund that."

Artificial Intelligence/Robotics ETFs: (AIQ), (BOTZ), (DTEC), (WTAI), (XAIX), (WISE), (GINN), (ROBT), (TECB), (XT), (THNQ), and (CHAT).