Chip frenzy cooling down? Morgan Stanley's Wilson: Funds are shifting towards AI supercomputing giants like Microsoft and Amazon

Author: Bu Shuqing, Wall Street Journal

The U.S. stock market is unlikely to reach new highs in the short term, as funds are flowing out of this year's best-performing semiconductor stocks and shifting towards AI hyperscalers.

Morgan Stanley's Chief Equity Strategist Michael Wilson pointed out in a recent report that the momentum in the semiconductor sector is fading, and investors are beginning to turn to AI supercomputing giants that have underperformed this year, including Microsoft, Amazon, and Meta.

He believes that this rotation is occurring against a backdrop of overall market volatility and weakness, with major indices likely to remain under pressure. Wilson also maintains the year-end target price for the S&P 500 at 8000 points, indicating about a 7% upside from current levels.

The direct impact of this judgment on the market is that the chip stocks that previously led the AI rally are facing valuation pressure, while the supercomputing giants, with their strong core businesses, are expected to become a new focal point for funds. Meanwhile, JPMorgan strategist Mislav Matejka shares a similar view, believing that the market's upward momentum will extend beyond the tech sector in the second half of the year.

Chip Momentum Fades, Valuation Pressure Emerges

The Philadelphia Semiconductor Index has fallen nearly 14% since reaching a historic high last month, with growing concerns about valuation bubbles. Nevertheless, the index has still risen 123% since September last year, reflecting the magnitude of previous gains.

Micron Technology released an unexpectedly optimistic sales forecast last month but failed to boost chip stocks' continued rise, further confirming the sector's waning momentum. Currently, investors are waiting for companies like NVIDIA to provide more clues about AI chip demand.

Wilson noted that the disintegration of momentum is occurring among companies with larger weights in the index, which will keep major U.S. benchmark indices under pressure in the short term. The S&P 500 has gradually retreated since peaking in early June.

Supercomputing Giants: A Value Undervalued in the AI Ecosystem

Wilson stated that he is currently more inclined towards supercomputing giants rather than semiconductor-related stocks. He believes that companies like Microsoft, Amazon, and Meta are attractive within the AI ecosystem, primarily because their strong core businesses provide solid support.

In contrast, according to Bloomberg data, a basket of supercomputing giants compiled by UBS has fallen 2% since September last year, sharply contrasting with the gains in the semiconductor sector, indicating that this group has relative room for catch-up.

However, Wilson also anticipates that supercomputing giants may begin to lower their expectations for capital expenditure plans in response to recent market concerns about excessive investments in AI. The outlook for capital expenditures will become a core topic of interest for investors in the next phase.

Expanding Rotation Scope, Opportunities Beyond Tech Emerge

Wilson's rotation logic is not limited to the supercomputing sector. He is also optimistic about consumer discretionary, transportation, and biotechnology sectors benefiting from the outflow of funds from chip stocks.

JPMorgan strategist Mislav Matejka agrees with Wilson's view, believing that the market's upward momentum will extend beyond the tech sector in the second half of the year. "AI is unlikely to be the only story in the market," Matejka wrote in a research report.

It is worth mentioning that Wilson previously accurately predicted that the U.S. stock market would maintain resilience amid geopolitical risks due to strong corporate earnings, adding some reference value to his current judgment. His year-end target price for the S&P 500 at 8000 points implies about a 7% potential increase from current levels, but short-term volatility risks cannot be ignored.