Author: Bu Shuqing, Wall Street News
The U.S. stock market may struggle to reach new highs in the short term, with capital flowing out of semiconductor stocks, which have seen the biggest gains this year, and shifting toward AI hyperscale cloud computing providers (hyperscalers).
Michael Wilson, chief U.S. equity strategist at Morgan Stanley, noted in a recent report that momentum in the semiconductor sector is fading, and investors are beginning to turn to AI hyperscale giants, including Microsoft, Amazon, and Meta, which have underperformed this year.
He believes this rotation is occurring against a backdrop of overall market weakness and volatility, with major indices likely to remain under pressure. Wilson maintains his year-end S&P 500 target of 8000 points, suggesting about 7% potential upside from current levels.
The direct market implication of this view is that chip stocks, which previously led the AI rally, face valuation pressure, while hyperscale giants, with their robust core businesses, are poised to become the new landing spot for capital. Concurrently, JPMorgan strategist Mislav Matejka shares a similar view, expecting market gains to broaden beyond the tech sector in the second half of the year.
Semiconductor Momentum Fades, Valuation Pressure Emerges
The Philadelphia Semiconductor Index has fallen nearly 14% since hitting a record high last month, as concerns over a valuation bubble persist. Nevertheless, the index is still up 123% since September last year, highlighting the magnitude of its prior gains.
Micron Technology's better-than-expected sales forecast last month failed to sustain a rally in chip stocks, further confirming the sector's fading momentum. Investors are now awaiting insights from companies like Nvidia for more clues on AI chip demand.
Wilson points out that momentum is breaking down among the larger, heavily weighted companies within the index, which will likely keep major U.S. benchmarks under pressure in the near term. The S&P 500 Index has been gradually retreating since peaking in early June.
Hyperscale Giants: Value Picks in the AI Ecosystem
Wilson stated a recent preference for hyperscale giants over semiconductor-related stocks. He finds companies like Microsoft, Amazon, and Meta attractive within the AI ecosystem, citing their strong underlying core businesses as a solid foundation.
In contrast, according to Bloomberg data, a basket of hyperscale giants compiled by UBS Group has fallen 2% since last September, presenting a stark contrast to the gains in the semiconductor sector and suggesting relative catch-up potential for this group.
However, Wilson also anticipates that hyperscale giants may begin to temper expectations for their capital expenditure plans in response to recent market concerns over excessive AI investment. Capital expenditure outlooks are set to become a core focus for investors in the next phase.
Rotation Broadens, Opportunities Beyond Tech Emerge
Wilson's rotation thesis is not limited to the hyperscale sector. He also sees potential beneficiaries from the outflow of chip capital in consumer discretionary, transportation, and biotech sectors.
JPMorgan strategist Mislav Matejka agrees with Wilson, expecting market gains to extend beyond the technology sector in the second half of the year. "AI is unlikely to be the only story in the market," Matejka wrote in a research note.
It is worth noting that Wilson previously correctly predicted that U.S. equities would remain resilient amid geopolitical risks, supported by strong corporate earnings, which adds a degree of reference value to his current assessment. His year-end S&P 500 target of 8000 points implies roughly 7% potential upside from current levels, but short-term volatility risks should not be ignored.
