Written by: Rita

The S&P 500's EPS is expected to reach $365 this year and $420 next year, with JPMorgan raising the year-end target price from 7,800 points to 8,000 points.

The data comes from JPMorgan's latest market update report from its US stock strategy team, which highlighted the support provided during the second-quarter earnings season. 87% of S&P 500 companies have disclosed their performances, with 78% outperforming expectations and earnings growth reaching 53%. But more critically, the balance between AI capital expenditure and monetization is undergoing subtle changes, with cloud giants improving their order coverage and the ratio of backlog orders to capital expenditures increasing, indicating that monetization may begin to outpace spending.

JPMorgan believes this is one of the strongest fundamental backgrounds since the 2008 financial crisis. Despite maintaining a 20 times price-to-earnings ratio, the upward revision of earnings is sufficient to support a continued increase in the target price.

AI Capital Expenditure: After $900 Billion is $1.2 Trillion

JPMorgan's data shows that AI-related capital expenditure is expected to reach approximately $900 billion in 2026, an 85% year-on-year increase. By the end of 2027, this figure will surpass $1.2 trillion. For reference, since the launch of ChatGPT at the end of 2022, cumulative AI capital expenditure has only been $233 billion, and the investments in the next two years will be nearly ten times the total of the past four years.

JPMorgan expects that hyperscale vendors will be the dominant force, accounting for about 87% of total AI capital expenditure in 2026 and 2027. Overall capital expenditure for the S&P 500 is expected to be $1.5 trillion this year, with AI companies already accounting for 59%, and this share is expanding.

The inflation of capital expenditure is squeezing free cash flow. The gap between net profit and free cash flow for hyperscale vendors has widened to $430 billion, with net profit at about $599 billion and free cash flow at only $169 billion. By the end of 2023, both were still around $240 billion. Excluding Microsoft, JPMorgan expects most hyperscale vendors to maintain negative free cash flow from 2026 to 2027.

Private Equity Gains Make Profit Numbers Look Larger

The 53% earnings growth in the second quarter needs to be discounted.

Google and Amazon reported GAAP net profits of $112 billion (+220%) and $63 billion (+216%) in the second quarter, respectively, driven primarily by unrealized gains from private equity investments, with Google recording about $99 billion and Amazon about $53 billion in a single quarter. This mainly stems from Anthropic's $65 billion Series H financing in May, achieving a valuation of $965 billion.

The unrealized gains from these two companies alone have reached $152 billion, contributing about $14 per share to the S&P 500's second-quarter earnings. Coupled with the first quarter, the total contribution for the first half of the year is about $18, accounting for 6% of the expected earnings growth for the entire year.

JPMorgan points out that these gains have three characteristics: they are non-cash, unsustainable, and may bring more volatility due to IPOs. After removing this impact, the actual earnings growth rate for the S&P 500 in the second quarter is about 31%, lower than the surface figure of 53%. The normalized earnings per share for 2026 is about $347 (+28%), differing from the apparent $365.

Backlog Orders and Cloud Revenue Both Rise

In the second quarter, cloud revenue growth collectively exceeded expectations: AWS grew by 37% year-on-year, the fastest in 18 quarters; Azure grew by 43%; Google Cloud recorded a record growth rate of 82%. More critically, the expansion of backlog orders saw Google Cloud's backlog increase by $55 billion quarter-on-quarter to $514 billion, AWS's backlog increased by 36% quarter-on-quarter to $496 billion, nearly 2.5 times year-on-year. Microsoft did not disclose comparable data, but management stated that Azure demand continues to exceed supply, with new capacity quickly being monetized.

JPMorgan measures AI monetization efficiency with two indicators: the ratio of backlog orders to capital expenditure and the order-to-revenue ratio. Both indicators are improving, indicating that order coverage is increasing and monetization speed is catching up with spending speed. Amazon's management particularly emphasized that the payback period for investments in servers and network equipment is less than three years (with a device lifetime of five to six years), while the lifespan of data center assets exceeds 30 years, supporting multiple generations of servers.

Market concerns regarding the return on investment in AI are easing, but the pressure on free cash flow remains.

Tariff Refunds Are a One-time Bonus, Consumption K-shaped Dichotomy Continues

The U.S. Supreme Court's ruling on IEEPA tariffs has allowed companies to receive refunds, with JPMorgan estimating the total refund amount to be about $166 billion, of which approximately $80 billion has actually been refunded as of June. More than 60 companies in the S&P 500 have reported or discussed the positive effects of tariff refunds, with quantifiable disclosed gains totaling about $5 billion, primarily concentrated in non-essential consumer goods (Ford $1.3 billion, Nike $986 million, Amazon $600 million, General Motors $500 million, Tesla $200 million) and the industrial sector.

The vast majority of companies have explicitly stated that this is a one-time, non-recurring gain. Eight companies have explicitly raised forward earnings per share, profit margins, or cash flow guidance due to refunds. Others have not incorporated the refunds into their forward guidance due to the uncertainty of the timing of receipt. JPMorgan expects the effective tariff rate to remain within a fluctuating range, with relatively mild effects on the index level.

The picture on the consumer side is more divided. Low-income households are still squeezed by inflation and oil prices, resulting in smaller shopping baskets, a shift towards private labels and value products, and increased sensitivity to promotions. High-end consumption remains resilient, with strong demand for spirits, premium food, travel accommodation, luxury items, and collectibles. Discount retailers and membership-based warehouse supermarkets are performing strongly across income groups. The K-shaped recovery remains unchanged.

Cloud Revenue Is Accelerating, Floating Profits Are Unsustainable

Cloud revenue is accelerating, backlog orders are expanding, and order coverage is increasing. These operational improvements are supported by data. However, a significant portion of the 53% earnings growth in the second quarter comes from the unrealized gains on private equity investments from Anthropic's financing round, which are unrelated to operational improvements. AI is a real demand, but the floating profits in paper numbers are unsustainable.

Disclaimer

This article is a整理 and interpretation of third-party brokerage research reports (J.P. Morgan, August 9, 2026) by潮向 research, combined with整理 of publicly available market information. The ratings, target prices, earnings forecasts, and related judgments quoted in the text are the opinions of the analysts of that brokerage, representing only the position of their institution, and do not represent the views of潮向 research or constitute any investment advice.

The market has risks, and decisions should be independent. This article should not be used as a basis for buying or selling any securities.