JPM EOTM Oct 8 Califoreboding

EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • October 8, 2026 US Economy and Iran War Tracker

Califoreboding I was on the West Coast seeing clients last week. California1 is a strange place; despite energy costs that are 50% higher than the national median and even higher than Alaska (see chart), the highest individual income tax rate and 6th highest corporate income tax rate, the least affordable home ownership market, the largest number of state-level regulatory restrictions, the highest state unemployment rate at 5.1% and the highest rate of unsheltered homeless in the US at 66%, California has experienced the third highest state GDP growth over the last year at 3.6% behind only New York and Idaho, a result largely attributable to AI. Many client questions I received were laden with a sense of foreboding: third rail questions about the US Federal debt as ten year yields blow through the Bessent Maginot line, the elevated share of market returns and growth attributable to AI, the sustainability of US equity markets close to all-time highs, Anthropic’s dire warnings about open weight models and cyber risks, stress in private credit and European deindustrialization. This Eye on the Market walks through my responses to these questions. What about the 2026 US midterms? There will be time enough to discuss all of that when they’re over, although no matter the outcome, I doubt there will be substantial near-term impacts on financial markets. For now, just look at the second chart which I consider to be hilarious. The cost of energy in California…and what that mix would Do you think the level of corruption under the Trump cost elsewhere; $ / mmbtu of final energy consumption administration is better or worse than other recent $45 presidential administrations? CA Percent of GOP respondents only $40 NY 35% 80th percentile (WA) 30% $35 Median (GA) 25% 20th percentile (TN) $30 20%

$25 15% 10% $20 5% $15 0% A lot better A little better The same A little worse A lot worse Source: EIA, LLNL, JPMAM, 2026 Source: Ipsos, August 2026

Michael Cembalest JP Morgan Asset Management

Note: the energy chart above computes the cost of Califoreboding energy per mmbtu for California’s actual fuel-sector mix (electricity, natural gas, distillates, renewable fuels, diesel and gasoline as consumed by transport, industrial, commercial and residential sectors). We then take that same fuel-sector mix and compute what it would cost in other states based on their respective energy prices. More to come in the 2027 energy paper.

1 Sources include the 2024 Mercatus StateReg Data Project, US Department of Housing and Urban Development, Public Policy Institute of California, EIA, Lawrence Livermore National Labs, Tax Foundation, HUD Office of Policy Development and Research 1

EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN • October 8, 2026 US Economy and Iran War Tracker

One trick pony: the concentrated contributions of AI to US markets and growth Anyone concerned about US reliance on AI, look no further. The charts below show that (i) a basket of 42 AI stocks accounts for 60%-80% of all S&P earnings growth, price returns and capital spending since Jan 2024; (ii) at the same time, 60% of S&P 500 stocks are down 20% or more from their all-time highs despite the market being close to all-time highs… S&P 500 share of returns, earnings growth and capex % of stocks more than 20% below all-time highs when the growth from AI stocks since January 2024 S&P 500 was within 1% of its all-time high, % 80%

Hundreds 42 AI stock basket 70% S&P 500 ex-AI basket 80% 81% 60% September 25, 2026 50% 60% 67% 40% 58% 40% 30% 20% 20% 10% 0% 0% Price return Earnings growth Capex / R&D growth Number of instances Source: Bloomberg, JPMAM, October 7, 2026 Source: FactSet, JPMAM, October 1, 2026

…(iii) only 30% of stocks are outperforming the S&P 500, one of the lowest figures since 1991; (iv) AI is primarily benefitting AI supply chain companies rather than the companies adopting it… Share of S&P 500 companies outperforming the index on a S&P 500 AI supply chain, AI adopters and non-AI adopters 3 year trailing basis, Percent Trailing 12-month earnings, index (100 = March 2023) 80% 450