Strategists at JPMorgan state that the combination of an AI supercycle and upward revisions to corporate earnings is expected to drive the S&P 500 index higher this year, though the path upward is unlikely to be smooth.

In a mid-year global research outlook report released on Wednesday, the bank noted that as the US and Iran advance peace agreement talks, "markets are gradually moving towards the optimistic baseline scenario we previously forecast, leading us to raise our year-end target for the S&P 500 index to 7800 points."

The bank's previous target was 7600 points. The new target implies a potential gain of nearly 6% from the index's closing level on Tuesday. However, the ascent is expected to be volatile and will likely need to overcome several significant hurdles.

The strategists forecast that the US Federal Reserve will keep interest rates unchanged through 2026, with a shift to a rate-hiking cycle not occurring until 2027. The institution believes the primary trend in the US stock market will remain highly concentrated in large-cap, high-quality growth stocks and those directly benefiting from the artificial intelligence theme.

The outlook report warns that speculative trend trading in secondary AI-related stocks has reached extreme levels, creating a risk of a market reversal, with a high probability of a flash crash. A flash crash refers to a rapid, severe decline in asset prices over a very short period, often followed by a swift rebound.

The strategists also pointed out, "Current market fundamentals remain robust, and investors could view any technical pullback as a buying opportunity."

JPMorgan has raised its 2026 S&P 500 earnings per share (EPS) forecast to $350, representing a substantial year-over-year surge of 29%. This revision is primarily driven by an historically rare wave of corporate earnings upgrades, with AI-related capital expenditure budgets from major hyperscale cloud providers and technology firms nearly doubling.

The bank indicated that its internal credit card spending data shows continued resilience in US consumer fundamentals. However, communications from numerous companies during earnings reports reveal a clearly bifurcated consumer market, where spending is becoming more rational and value-focused, with no broad-based, comprehensive recovery in consumer spending evident.

Year-to-date, the S&P 500 has gained close to 8% and has rebounded 16% from its low on March 30. This rally has been primarily led by the technology sector, with a technology industry ETF rising 27% this year, led by gains in the semiconductor segment.