AI investors may pivot to hyperscalers from chipmakers, Morgan Stanley says

Morgan Stanley said the recent weakness in U.S. semiconductor stocks is a sign that the market gains are broadening, with investors likely to turn toward AI "hyperscalers" as well as consumer discretionary, transport and biotechnology shares.

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 U.S. Federal ​Reserve, along with a fall in crude oil prices, is also driving the rotation out of the red-hot chips trade.

Consumer discretionary goods, transports and biotechnology-related stocks could benefit from the rotation, according to the brokerage.