MU, AMD, other chip stocks gain but Morgan Stanley sees pivot away from chipmakers

Semiconductor stocks were in the green on Monday but Morgan Stanley says recent weakness in the category suggests investors are increasingly looking beyond chipmakers and toward a broader set of beneficiaries from the artificial intelligence boom.

In a note released on Monday, the brokerage said the recent weakness in US semiconductor shares suggests market leadership is broadening, and hyperscalers — large technology companies investing heavily in artificial intelligence infrastructure and data centres — are well positioned to outperform as the market rotates away from semiconductor names.

The group of hyperscalers includes companies such as Microsoft, Amazon and Meta Platforms, all of which have committed billions of dollars to expanding AI infrastructure.

"We also believe this cohort possesses attractive optionality within the AI ecosystem: strong core businesses, the ability to participate in/lead the agentic application layer development and implementation, as well as an underappreciated cost-cutting lever," the strategists said.

Although these technology giants have sharply increased capital expenditure to support AI development, investors continue to debate whether AI-powered products will generate sufficient returns to justify the spending.

Morgan Stanley, however, said there could be "more capex discipline in the near-term" and argued that hyperscaler stocks have already endured a period of underperformance.

Despite the note, chip stocks were up on Monday, with Micron up by over 4.1%, AMD up by over 9.4%, Nvidia up by about 0.6%, and Marvell Technology up by 5.1%.

Chip rally loses momentum

The brokerage's comments come after semiconductor stocks significantly outperformed the broader technology sector over recent months.

While Alphabet, Amazon, Meta Platforms and several other hyperscalers faced heavy selling in June, the Philadelphia Semiconductor Index climbed 11% during the month.

However, sentiment has shifted in recent weeks.

The Philadelphia Semiconductor Index has now fallen nearly 14% from its record high reached last month as investors grow increasingly concerned about stretched valuations.

Even after the pullback, the index remains about 123% higher since September, highlighting the scale of the rally that has been driven by surging demand for AI chips and data-centre hardware.

Over the same period, a UBS basket tracking hyperscaler stocks has declined 2%.

Morgan Stanley believes this changing performance reflects a natural rotation within the AI investment theme rather than a collapse in enthusiasm for artificial intelligence.

Broader market rotation expected

The brokerage also expects the market rotation to extend beyond technology.

Wilson said easing expectations for additional Federal Reserve interest-rate hikes, combined with declining crude oil prices, should provide support for consumer discretionary companies, transport stocks and biotechnology firms.

The strategists nevertheless warned that the semiconductor pullback could create greater volatility across equities because many of the largest chip companies have become key drivers of broader market performance.

While they described the recent weakness as part of the alternating leadership seen among AI-related sectors over the past two years, they cautioned that investors should expect a "choppy/weaker equity market overall."

Wilson maintained a year-end target of 8,000 for the S&P 500, implying roughly 7% upside from current levels.

Earlier this year, he correctly predicted that US equities would look past geopolitical tensions as strong corporate earnings continued to support valuations.

Morgan Stanley's outlook echoes views expressed by other Wall Street strategists.

JPMorgan strategist Mislav Matejka has also argued that the second half of the year is likely to see market leadership broaden beyond technology.

"AI is unlikely to be the only story in town," Matejka wrote in a recent note.