Morgan Stanley: AI chip sector cools, cloud giants may see rotation.

Morgan Stanley strategist Mike Wilson’s team says the semiconductor stock pullback of recent weeks may not be complete yet, and could bring a more volatile trading environment to the broader U.S. stock market. The bank points out that rotation is occurring within AI-related trades: earlier, chip stocks significantly outperformed, while hyperscalers including Microsoft, Amazon, Alphabet, and Meta lagged behind. Wilson’s team notes this divergence is unlikely to persist, as semiconductor firms’ growth ultimately depends on cloud giants’ capital expenditures. Morgan Stanley adds that valuation and position pressure on cloud giants have already been priced in; if the market starts rewarding more restrained AI spending, this sector could see renewed capital inflows. The bank also favors consumer discretionary and biotech, stating that falling oil prices and declining interest rate expectations may improve the risk-reward profile of these sectors.