JPM Cembalest

EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • July 22, 2026 Online Trump and Iran War Tracker

The Summer I Turned Pretty…cautious on US equity market technicals; an update on the growing pool of open and closed weight competitors to the frontier AI labs A couple of years ago, many investors were in a frenzy due to the allegedly infallible signal of inverted yield curves leading to US recession. We argued that a recession was unlikely, and the loudest adherents of recession faded away as the economy continued to grow. In other words, technical don’t always work. That said, I’m concerned about the technicals below due to the role AI has played in growth, capital spending and profits. The worrisome part of a boom cycle is when companies closest to final demand roll over, even as capital spending beneficiaries of the cycle keep on thriving1. In late 1999 and early 2000, communications services companies rolled over (Verizon, AT&T, WorldCom, Bell South, GTE, Sprint) even as communications equipment company stocks (Cisco, Nokia, Nortel, Qualcomm, Motorola) kept on rising. The obvious parallel to today is soaring stock prices and free cash flow for semiconductor companies (the caboose) even as the front end of the train (hyperscalers) are seeing stock prices stagnate and free cash flow plummet. All of these trends are shown in the charts below. Communications equipment vs services, 1999-2000 Verizon vs Cisco, 1998-2001 Index Index Price, US$ Price, US$ 1,200 500 $150 $70 Comm equipment stocks keep rising after rollover in comm services 1,000 Verizon $60 $120 420 $50 800 S&P 500 comms $90 equipment index $40 600 340 Huge rally in Cisco even $60 though Verizon flatlined $30 400 $20 S&P 500 comms 260 Cisco services index $30 200 $10

0 180 $0 $0 Jan-99 Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Source: Bloomberg, JPMAM, July 20, 2026 Source: Bloomberg, JPMAM, July 20, 2026

Philadelphia semiconductor index & hyperscalers basket Hyperscalers vs semiconductors free cash flows Total return index (100 = June 1, 2025) 12 month trailing free cash flows, US$ billions Consensus 325 $500 estimates 300 Semis: NVDA, MU, AVGO, AMAT Philadelphia 275 semiconductor $400 Hyperscalers: META, AMZN, GOOG, index MSFT, ORCL 250 $300 225 Hyperscaler 200 basket: $200 175 GOOGL, AMZN, MSFT, META, $100 150 ORCL 125 $0 100 75 -$100 Jun-25 Aug-25 Oct-25 Dec-25 Feb-26 Apr-26 Jun- Source: Bloomberg, JPMAM, July 20, 2026 Source: Bloomberg, JPMAM, July 21, 2026

1 “Equity technical update”, Jason Hunter, JP Morgan Technical Strategy, July 1, 2026 1

EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • July 22, 2026 Online Trump and Iran War Tracker

More technicals to watch. As shown in the first chart, tech sector earnings typically track reasonably well with sectors that rely heavily on technology (finance, manufacturing, media, transport and healthcare) and pay for all that equipment and software. The recent divergence begs the question: who is going to pay for the AI boom if the tech sector’s primary customers are not making more money as well? On the right, if we look at all four-year periods for S&P 500 performance since 1928, the current one (starting in 2022) is way into the top decile. The bottom line: the good times are rolling, but for how long? Earnings growth of US technology vs other AI industries S&P 500 4 year performance every year since 1928 y/y change % Index (0% = the start of each four year period), percentiled at end only 80% 100% Current Top decile 60% 80% Top quartile 60% Median 40% Bottom quartile 40% Bottom decile 20%

0% 20% 0% -20% -20% -40% US tech sector -40% -60% US sectors heavily using technology/AI -60% -80% Days Source: Absolute Strategy Research, WorldScope, LSEG, 2026 Source: Bloomberg, JPMAM, July 21, 2026

Can frontier AI labs afford a price war right now? Threats from Inkling and Kimi 3 and other new models A new price war has started on token prices. This time price pressures are coming not only from China but also from the US, specifically from Meta Muse Spark 1.1 and SpaceXAI Grok 4.5 (both closed models). Both have costs that are a fraction of Claude and GPT with only a…