(Bloomberg) — US stocks will struggle to reach new highs as investors rotate out of some of this year’s biggest winning technology trades, according to Morgan Stanley strategists.
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The team led by Michael Wilson says momentum is fading in semiconductor stocks as investors shift toward laggards, including artificial intelligence hyperscalers.
He notes this cohort, which includes the likes of Microsoft Corp., Amazon.com Inc. and Meta Platforms Inc., is attractive within the AI ecosystem due to their strong core businesses.
Still, the strategist said major US benchmarks will remain under pressure in the short term “given the momentum unwind is happening in some of the larger companies in the index.” Wilson added that the rotation continues “in a choppy/weaker equity market overall.”
The Philadelphia Semiconductor Index has slumped nearly 14% from a record last month as investors worry about ballooning valuations. Still, the gauge remains 123% higher since September, while a UBS Group AG basket of hyperscalers is down 2% over the period. The S&P 500 Index has drifted lower since hitting a peak in early June.
After a blowout sales forecast from Micron Technology Inc. last month failed to sustain a rally in chipmakers, investors are waiting to hear from the likes of Nvidia Corp. for further clues on AI chip demand. The focus will also be on capital expenditure projections from hyperscalers after recent concerns that they may be overspending on AI.
Wilson said he favors hyperscalers over semiconductor-related stocks in the near term. He also expects hyperscaler companies to potentially start to soften expectations of their spending plans given the recent run of underperformance.
The strategist has a target of 8,000 for the S&P 500 by year end, implying gains of about 7% from current levels. He correctly predicted earlier this year that US stocks would shrug off geopolitical risks on the back of robust corporate earnings.
Wilson also expects the consumer discretionary, transport and biotech sectors to benefit from the rotation out of chipmakers. JPMorgan Chase & Co. strategist Mislav Matejka shares Wilson’s view that the market rally will broaden beyond technology in the second half of the year.
