Morgan Stanley's Lisa Shalett has issued a stark warning about semiconductor stocks, arguing that signs are emerging that chipmakers' pricing power is weakening despite the AI-driven rally. As reported by Bloomberg, Shalett described semiconductor stocks as "meaningfully overbought" and noted that the Philadelphia Semiconductor Index's price-to-earnings ratio has more than tripled since 2022. The chief investment officer at Morgan Stanley Wealth Management explained that "We are seeing the AI data center tech stack being re-engineered to include lower cost proprietary chips that many of the hyperscalers are now designing themselves." She expects slowing AI infrastructure spending and weaker pricing power to challenge chipmakers, despite continued investor interest and SK Hynix's Nasdaq debut after raising $26.5 billion in the largest-ever US initial share sale by a foreign company.
Morgan Stanley strategists led by Chief Investment Officer Michael Wilson have warned that the blistering rally in AI chip stocks may be losing momentum, advising investors to rotate toward hyperscalers instead. According to the latest note, the Philadelphia Semiconductor Index (SOX) has surged 96% year to date at its peak and trading roughly 35% above its 50 day moving average, the widest gap in about 25 years. That extended run gave way to sharp volatility, with the SOX jumping 7.3% in one week before reversing to fall 7.9% the next, and at one point posting a single session drop of 10%, its steepest one day fall since 2020. Wilson's team called this movement a "rotation" out of chips and into AI names that have lagged the rally, naming Microsoft, Amazon and Meta as preferred picks given their resilient core businesses.
Wall Street semiconductors have remained on edge since last week, with the whiplash continuing to affect major chipmakers. In the run up to market open, Micron traded 5.5% lower at $931 and AMD slumped 4% to $530 after touching a record high on Monday on a target price hike by Goldman Sachs. Jensen Huang's bellwether Nvidia traded 0.75% lower at $194.09, and Intel Corp shed 4.5% to trade at $116.68. The chipstocks will likely drag down the tech-heavy Nasdaq index, as futures point to a gap down open with Nasdaq 100 down nearly 1% to 29,665.25 during pre-market trade. This latest decline follows the SOX index down nearly 14% from its record high and the broader Nasdaq Composite index down slightly over 1% during the same period, as reported by MarketWatch.
Morgan Stanley cautioned that because the weakness is hitting major technology companies rather than a narrow corner of the market, it could translate into a "weaker equity market overall," with consumer discretionary, biotech and transport seen as likely beneficiaries of the rotation. Meanwhile, hyperscalers such as Microsoft, Amazon, Meta, and Google pour hundreds of billions of dollars into data centers, with markets increasingly treating that spending as a cost without proven payoff. In contrast, Microsoft shares are down more than 17% this year and Meta over 10%, while Amazon has gained roughly 7%. The divergence highlights the market's shift from companies that earn revenue from AI infrastructure to those that spend on it, with Goldman Sachs derivatives specialist Brian Garrett explaining that "the market is rightly rewarding the names that earn (capex beneficiaries, semiconductors, etc) while at the same time questioning the names that spend (hyperscalers)".
Two of Wall Street's biggest banks have issued conflicting advice on artificial intelligence investment strategies, highlighting a significant split in market sentiment. JPMorgan tells clients the recent selloff in AI chip prices represents a buying opportunity, while Morgan Stanley's chief investment officer Michael Wilson sees the momentum behind chip stocks fading. The disagreement centers on timing rather than direction, as both banks maintain support for the broader AI boom while differing on where the next gains will emerge. Wilson's latest analysis reveals a strategic shift from chips to hyperscalers, with the firm picking Microsoft, Amazon, and Meta as favorites among AI hyperscalers according to a Morgan Stanley note. Wilson's team expects the S&P 500 to top 8,000 points by the end of this year, implying an upside potential of about 7% from current levels.
