JPMorgan's 7%-8% 12-Month Return Outlook for U.S. Equities: Strategic Rebalancing in a Post-Recessionary Cycle

The U.S. equity market is entering a pivotal phase as JPMorgan Research projects a 7%-8% return for the S&P 500 over the next 12 months, with the index expected to close near 6,000 by year-end 2025. This outlook, rooted in robust corporate fundamentals and a shift in policy dynamics, presents a compelling case for investors to rebalance portfolios toward AI-driven sectors and reposition for a post-recessionary cycle.

Drivers of the 7%-8% Return: Earnings Growth and AI Momentum

JPMorgan's forecast hinges on two pillars: double-digit earnings growth and the dominance of AI-related sectors. The firm anticipates S&P 500 earnings to expand by high single digits in 2025, accelerating to 12–13% in 2026. This resilience stems from corporate adaptability to trade policy shifts, with 57% of S&P 500 companies maintaining or raising guidance despite tariff uncertainties.

The AI sector, in particular, is the linchpin of this growth. Tech, communication services, and even utilities and real estate with AI exposure are leading the market. For instance, the AI data center basket has historically outperformed the broader index, signaling its role as a directional barometer. underscores this trend, with AI stocks surging 20–30% year-to-date.

Policy Shifts and Positioning: A New Era of Dovishness

The Trump administration's pivot from hawkish trade policies to a focus on tax cuts and deregulation has further bolstered investor sentiment. Tariff-related volatility, once a drag on growth, has been mitigated by corporate cost-sharing and a more moderate investor stance. Institutional and foreign investors remain key tailwinds, though their influence is expected to wane as the year progresses.

highlights the unwinding of long-duration bond positions, reflecting a shift toward equities. Meanwhile, the Federal Reserve's anticipated 25-basis-point easing in December 2025 and further cuts in early 2026 will provide liquidity support, though market expectations already price in a more aggressive easing path.

Strategic Rebalancing: Prioritize AI, Hedge Against Risks

For investors, the 7%-8% return outlook necessitates a strategic rebalancing of portfolios. Here's how to position for success:

1. Overweight AI-Driven Sectors: Allocate capital to companies leading the AI revolution, such as NVIDIA, Microsoft, and Amazon. These firms are not only benefiting from near-term demand but also reshaping industries through long-term innovation.
2. Underweight Traditional Cyclical Sectors: Consumer discretionary and industrials, while still relevant, have diminished weight in the S&P 500. Their performance is increasingly tied to macroeconomic risks, such as inflation and trade policy shifts.
3. Diversify Across Geographies: JPMorgan's bearish view on the U.S. dollar and its expectation of EM currency outperformance suggest opportunities in emerging markets, particularly in tech-driven economies like India and Southeast Asia.
4. Hedge Against Volatility: While the market has priced in most tariff risks, structural issues—such as reduced immigrant flows and R&D investment—pose long-term headwinds. Defensive positions in utilities and healthcare can balance growth-oriented bets.

Investment Advice: Timing and Execution

The 7%-8% return range assumes a continuation of current trends, but execution is critical. Investors should:
- Monitor Earnings Revisions: S&P 500 companies have shown resilience in maintaining guidance. A decline in upward revisions could signal a slowdown.
- Leverage Derivatives for Positioning: Use options and futures to hedge against potential volatility, especially as trade policy uncertainties persist.
- Rebalance Quarterly: Adjust allocations based on sector rotation and macroeconomic data, such as the Fed's policy path and global growth indicators.

Conclusion: A Window of Opportunity

JPMorgan's 7%-8% return outlook for U.S. equities is not merely a projection—it's a call to action. The confluence of earnings growth, AI-driven innovation, and dovish policy creates a rare window for strategic positioning. By rebalancing toward high-growth sectors and hedging against macroeconomic risks, investors can capitalize on the post-recessionary cycle and position portfolios for sustained returns.

serves as a cautionary tale: while growth stocks can outperform, they require disciplined management. The key is to align with the AI-led narrative while maintaining flexibility to adapt to evolving dynamics.

In a market where fundamentals and positioning are increasingly intertwined, the next 12 months offer a unique opportunity to build a resilient, forward-looking portfolio.