In a note dated Monday, the brokerage said hyperscalers — an industry term for tech companies that are spending big on data centers — could benefit from a rotation away from semiconductor stocks as the AI cycle shifts.
Although the likes of Alphabet and Amazon have committed billions to scale up their AI infrastructure, skyrocketing the share prices of semiconductor companies, clear evidence that AI products can generate returns that justify the spending is yet to be seen.
But Morgan Stanley said there could be “more capex discipline in the near-term” and that the hyperscaler stocks have already gone through their period of underperformance.
Alphabet, Amazon, Meta Platforms and others saw heavy selling in June, while the Philadelphia SE Semiconductor index climbed 11% last month.
But the chip index has fallen over 11% in the last two weeks, while the Roundhill Magnificent Seven ETF — a proxy to track the seven biggest Wall Street tech companies — has recovered some lost ground.
Morgan Stanley also said that the markets paring back expectations of rate hikes by the US Federal Reserve, along with a fall in crude oil prices, is also driving the rotation out of the red-hot trade chips.
Consumer discretionary goods, transports and biotechnology-related stocks could benefit from the rotation, according to the brokerage.
