Morgan Stanley says momentum in chip stocks is fading and is steering clients toward three AI hyperscalers — Microsoft, Amazon, and Meta. The firm warns the semiconductor slide could drag on the broader market, and JPMorgan agrees AI is no longer the only trade that matters.
Morgan Stanley told clients that momentum in chip stocks is fading, and it is pointing them toward hyperscalers that have lagged the rally. In a note cited by Bloomberg, the firm named Microsoft, Amazon, and Meta as its favorites among AI hyperscalers.
Strategists led by Chief Investment Officer Michael Wilson said the three stand out in the AI ecosystem because of their strong core businesses. JPMorgan strategist Mislav Matejka echoed that view, saying AI is unlikely to be the only story in town.
The hyperscaler picks have moved unevenly
The three names have not traded as a block. Microsoft shares have fallen more than 17% year-to-date, while Meta is down over 10%. Amazon, by contrast, has gained more than 7% over the same period.
The firm also expects the hyperscalers to soften their capital-spending plans amid worries about overspending. Together, Microsoft, Meta, and Amazon plan to spend about $525 billion in capital expenditure in 2026 to fund their AI infrastructure buildout.
A bumpy ride for the broader market
Morgan Stanley cautioned that weakness in chip stocks could make the broader market bumpy. The PHLX Semiconductor Index is down nearly 14% over the past two weeks, while the Nasdaq Composite is down slightly over 1% in the same span.
Because the selling is hitting major technology companies rather than smaller names, the firm said it could leave a weaker equity market overall. Even so, Wilson's team expects the S&P 500 to top 8,000 points by year-end, about 7% above current levels, after a gain of more than 9% so far this year.
Where the money may rotate
Wilson and his team expect the consumer discretionary, biotech, and transport sectors to benefit from the rotation out of chip stocks, helped by falling oil prices and elevated interest rates. According to CME FedWatch data, markets see higher odds that the Federal Reserve will hike rates by 25 basis points rather than hold at its September, October, and December meetings.
That backdrop of a possible rate hike shapes the firm's sector call. Morgan Stanley argued biotech offers attractive risk/reward if core inflation stays contained below 3%, as its house view holds.
Source: Stocktwits
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