Morgan Stanley strategist Wilson: Funds are expected to rotate from chip stocks to ultra-large cloud service providers
Strategists say U.S. stocks may struggle to reach new highs, with investors pulling money out of some of the best-performing technology stocks so far this year. The team led by strategist Michael Wilson said momentum in semiconductor stocks is fading, with investors turning to laggards such as AI hyperscale cloud service providers. He pointed out that this category of stocks includes and Meta Platforms Inc. These companies are attractive in the AI ecosystem due to their strong core businesses. However, he said major U.S. stock indexes will remain under pressure in the short term given that some of the largest companies in the index are experiencing a reversal in momentum. Wilson added that this rotation continues "amidst an overall volatile/weak stock market." The Philadelphia Semiconductor Index fell nearly 14% from its record high as investors worried about overvaluation. Still, the index is up 123% since September, while An index of the group's hyperscale cloud service providers fell 2% over the same period. The S&P 500 has continued to trend lower since its peak in June. Wilson said that in the short term, he is more optimistic about ultra-large cloud service providers than semiconductor-related stocks. He also predicted that hyperscale cloud service providers may start to lower their expectations for spending plans in light of recent poor performance. His year-end target for the S&P 500 is 8,000, which would imply an increase of about 7% from current levels. He also expects rotations out of chip stocks to flow into consumer discretionary, transportation and biotechnology sectors. Strategist Mislav Matejka also holds the same view, believing that the market rally in the second half of the year will extend beyond the technology sector.