Morgan Stanley strategists, particularly chief US equity strategist Mike Wilson, are observing a significant shift in investor sentiment, with capital predicted to move from semiconductor companies to AI "hyperscalers." This rotation is driven by several factors, including the recent weakness in U.S. semiconductor stocks—the Philadelphia SE Semiconductor index fell over 11% in two weeks—and a broader market realization that the gains from AI are broadening beyond just chipmakers. While semiconductor stocks saw a booming period, hyperscalers, despite committing billions to AI infrastructure, have not yet shown clear evidence that AI products can generate returns justifying the intense spending, leading to a period of underperformance.
Wilson and other analysts suggest that hyperscalers like Alphabet, Amazon, Meta Platforms, and Microsoft, which collectively comprise a significant portion of the "Magnificent Seven" stocks, are now looking "downright cheap." Business Insider reported on Monday that Morgan Stanley sees capital flowing from chip stocks back to hyperscalers as the market starts to reward disciplined spending. Ben Snider, another Morgan Stanley strategist, noted that hyperscaler stocks' price-to-earnings ratios are at similar levels to those seen during market lows, such as March 2020 and October 2022, making them attractive for their cheap valuations.
This shift is also influenced by broader economic factors, including the Federal Reserve paring back expectations of interest rate hikes and a fall in crude oil prices. Morgan Stanley anticipates "more capex discipline in the near-term" from hyperscalers, which could trigger a move in their stock prices. While the Philadelphia Semiconductor Index has slumped nearly 14% from a record last month, a UBS Group AG basket of hyperscalers is down 2% over the same period, indicating a potential reversal in fortunes as investors seek out laggards and a broader market rally.
