Morgan Stanley Warns Chip Stocks Momentum Is Fading, Favors Three Hyperscalers — JPMorgan Says AI ‘Unlikely’ To Be Only Trade In Town

• Morgan Stanley also 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 tech companies could result in a “weaker equity market overall.”
• Morgan Stanley expects the consumer discretionary, biotech, and transport sectors to benefit from the rotation out of chip stocks.

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.

According to a Bloomberg report citing a Morgan Stanley note, the firm picked Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), and Meta Platforms Inc. (META) as its favorites among 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.

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.”

Broader Markets To Be Bumpy Amid Chip Stocks Weakness, Says Morgan Stanley

Morgan Stanley also cautioned that weakness in chip stocks could lead to a bumpy ride for the broader stock market.

The PHLX Semiconductor Index (SOX) is down nearly 14% over the past two weeks, while the broader Nasdaq Composite index is down slightly over 1% during the same period.

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.

These Sectors Stand To Benefit, According To Morgan Stanley

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).

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.

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.

Also See: INTC Stock Has Surged 233% This Year — HSBC Sees Another 60% Upside As Foundry Business Becomes 'Too Good to Ignore'

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