Morgan Stanley has warned that the blistering rally in AI chip stocks may be losing momentum, advising investors to rotate toward hyperscalers instead.
In a note led by Chief Investment Officer Michael Wilson, the firm's strategists said semiconductor stocks have grown dangerously extended, with the Philadelphia Semiconductor Index (SOX) having surged 96% year to date at its peak and trading roughly 35% above its 50 day moving average, the widest gap in about 25 years.
That extended run gave way to sharp volatility. The SOX jumped 7.3% in one week before reversing to fall 7.9% the next, and at one point posted a single session drop of 10%, its steepest one day fall since 2020. Wilson's team called the move a "rotation" out of chips and into AI names that have lagged the rally, naming Microsoft, Amazon and Meta as its preferred picks given their resilient core businesses. Microsoft shares are down more than 17% this year and Meta over 10%, while Amazon has gained roughly 7%.
Morgan Stanley cautioned that because the weakness is hitting major technology companies rather than a narrow corner of the market, it could translate into a "weaker equity market overall," with consumer discretionary, biotech and transport seen as likely beneficiaries of the rotation.
The view splits with JPMorgan, which has told clients the chip pullback is a buying opportunity given tight supply and no meaningful new capacity expected before 2028. Both banks remain bullish on the broader AI theme but disagree on where the next gains will come from.
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