After a bruising selloff in chip stocks, Morgan Stanley strategists are pointing investors toward AI hyperscalers and other overlooked sectors as the next big opportunity.
Morgan Stanley’s CIO and Chief U.S. Equity Strategist Mike Wilson released analysis examining the sharp pullback in semiconductor stocks and what it signals for broader market positioning going forward.
The Philadelphia Stock Exchange Semiconductor Index, known as the SOX, fell 10% in a single session, marking its biggest one-day drop since 2020, according to Wilson’s note.
Wilson was quick to contextualize the decline, noting the index had risen 96% year to date heading into the middle of last week and was roughly 35% above its 50-day moving average.
He described that gap as the widest in approximately 25 years, with a nine-day relative strength index of 83 underscoring just how extended the semiconductor rally had become.
Because semiconductor stocks overlap heavily with the momentum trade, the long momentum factor also suffered its sharpest pullback since 2020, falling 8% alongside chip names.
Wilson characterized the semiconductor selloff as a “healthy reset” rather than evidence of deteriorating fundamentals, maintaining his year-end S&P 500 target of 8,000.
“In our view, a correction was inevitable and ultimately healthy if this bull market is going to extend into year-end, which remains our baseline with an 8,000 S&P 500 target,” Wilson said.
He argued the AI-driven capital expenditure cycle remains fully intact, with the pullback reflecting crowded positioning and technical factors rather than any fundamental shift in demand.
Wilson noted that consumer discretionary, transportation, and regional banking sectors stand to benefit as relative tailwinds shift away from semiconductors in the near term.
Falling oil prices and a Federal Reserve whose hawkishness is unlikely to match current market pricing both support Wilson’s optimistic outlook for those sectors.
“This doesn’t mean the cycle [for semiconductors] is over, though a lack of price momentum in the space for now is likely to give other areas of the market room to outperform as relative tailwinds drive groups like discretionary and transports,” Wilson said.
A central element of Wilson’s bullish broader market thesis is his belief that the strength of the full-market earnings recovery is being severely underestimated by investors right now.
He added that pullbacks of this nature are common during earnings-led bull markets following extended periods of strong price performance across momentum-driven sectors.
“While we might see some more choppiness in coming weeks, our conviction in the current bull market is intact,” Wilson said, reinforcing his confidence in continued equity gains.
Wilson also warned that extreme volatility in the semiconductor space has made it increasingly difficult for portfolio managers to maintain historically high allocations to the sector.
The SOX exemplified this turbulence, surging 7.3% in one week before reversing sharply and falling 7.9% the following week, illustrating the sector’s growing instability.
“In our view, this rotation away from the hyperscalers may be a leading indication that semis could now see a period of underperformance as earnings per share revisions breadth for the space comes up against historical extremes,” Wilson warned.
