Morgan Stanley strategists warned in their latest note that momentum in chip stocks is fading, as investors shift focus to hyperscalers that have been laggards. The firm picked Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), and Meta Platforms Inc. (META) as its favorites among AI hyperscalers, according to a Bloomberg report citing a Morgan Stanley note. Morgan Stanley strategists, led by Chief Investment Officer Michael Wilson, said these companies are their favorites in the AI ecosystem because of their strong core businesses. The rotation comes as the PHLX Semiconductor Index (SOX) fell nearly 14% over the past two weeks, while the broader Nasdaq Composite index declined slightly over 1% during the same period. The shift reflects broader concerns about chip sector momentum and investor appetite for diversification within technology stocks.
Microsoft shares have fallen more than 17% year-to-date, while Meta shares are down over 10%. Amazon shares have gained more than 7% during this period. JPMorgan strategist Mislav Matejka echoed the views of Wilson's team, saying, "AI is unlikely to be the only story in town."
Morgan Stanley Warns Chip Stocks Weakness Could Create Broader Market Volatility
Morgan Stanley cautioned that weakness in chip stocks could lead to a bumpy ride for the broader stock market. The firm added that while the weakness in chip stocks is due to investors rotating out of the sector, the fact that it is happening to major technology companies could result in a "weaker equity market overall," according to a report by MarketWatch.
Wilson and his team expect the S&P 500 to top 8,000 points by the end of this year, implying an upside potential of about 7% from current levels. The S&P 500 index has gained more than 9% so far this year. The firm also expects hyperscalers to soften their capital expenditure projections amid concerns of overspending. Between them, Microsoft, Meta, and Amazon plan to spend about $525 billion in capital expenditure in 2026 to fund their AI infrastructure buildout ambitions.
Consumer Discretionary, Biotech, and Transport Sectors Expected to Benefit from Rotation
Wilson and his team expect the consumer discretionary, biotech, and transport sectors to benefit from the rotation out of chip stocks, driven by falling oil prices and elevated interest rates. "Given our view that policy rate expectations remain overly hawkish this year in the context of our house call for core CPI to stay contained below 3%, we think biotech offers an attractive risk/reward opportunity," the firm stated.
According to data from the CME FedWatch tool, there are higher odds that the Federal Reserve will hike interest rates by 25 basis points rather than keep them unchanged at the September, October, and December meetings of the Federal Open Market Committee (FOMC).
The Invesco QQQ Trust (QQQ) is up 29% over the past 12 months, while the Global X Artificial Intelligence & Technology ETF (AIQ) is up 42%. The iShares Semiconductor ETF (SOXX) is up 134% during this period.
FAQ
Why did Morgan Stanley pick Microsoft, Amazon, and Meta as its favorite AI hyperscalers?
Morgan Stanley strategists, led by Chief Investment Officer Michael Wilson, said these companies are their favorites in the AI ecosystem because of their strong core businesses. The firm made this call as momentum in chip stocks fades and investors shift focus to hyperscalers that have been laggards.
What sectors does Morgan Stanley expect to benefit from the rotation out of chip stocks?
Wilson and his team expect the consumer discretionary, biotech, and transport sectors to benefit from the rotation out of chip stocks, driven by falling oil prices and elevated interest rates. The firm stated that biotech offers an attractive risk/reward opportunity given their view that policy rate expectations remain overly hawkish this year in the context of their house call for core CPI to stay contained below 3%.
